Emerging Markets Continue to Underperform on Growth Concerns
Emerging market equities corrected for the second successive month in March, on concerns that continuing weakness in European demand could hurt export growth for several countries in Asia and Latin America. These economies had seen a revival in their export fortunes during the second half of last year as U.S. consumer demand turned healthier. However, the moderation in U.S. consumer sentiment during March has somewhat dulled the optimism. Though it is now considered unlikely that the sequestration will have a significant negative impact on U.S. growth this year, the labor market conditions remain uncertain and could hurt consumption. Sustained monetary and fiscal easing by developed countries such as Japan that have led to currency devaluations could also make exports from emerging countries such as Korea less competitive in international markets. Markets in Eastern Europe, with the notable exception of Turkey, continued to decline, while in Asia, China and Korea lagged during the month.
Nevertheless, trends from the manufacturing and services sectors in major emerging countries remained mostly positive during the month. Manufacturing output expanded faster in China, Korea, Indonesia, and Taiwan, when compared to the previous month. Output growth was sustained in India, Russia, Mexico, and Brazil, though the pace of expansion slowed. Services activity picked up pace in China and India during the month of March. Mexico’s central bank lowered its benchmark rate for the first time since 2009 while the central banks in India also brought down borrowing costs as expected. The Chinese central bank took steps to restrict liquidity after inflation for the month of February was higher than expected.
Near-term Outlook
International prices of energy and industrial commodities, including copper and iron ore, have trended lower in recent months. This is indeed a positive development for large emerging economies such as China where inflation risks have trended moderately higher in recent months. In addition, lower inflation will likely support consumer demand in developed economies, especially the U.S., and help exports from emerging countries. However, lower commodity prices could also dampen the growth outlook for resource exporting countries such as Brazil, Chile, and Peru in Latin America, as well as Russia and South Africa. Brazil is yet to see a meaningful recovery in growth after the economy managed only a modest expansion last year. Russia, the world’s top energy producer, is being hurt by lower natural gas demand in Europe as coal prices remain low and the moderation in global oil exports as U.S. domestic production increases.
Nevertheless, fiscal and monetary policies in most emerging economies are expected to remain favorable as inflation risks are likely to be limited. Korea has announced a rate cut during the first week of April while the Russian central bank has indicated the possibility of lowering interest rates if growth signals weaken. Consumer inflation in China for the month of March was well below the previous month’s level, and has allayed fears about monetary policy tightening later this year. In India, though the central bank has been cautious about the scope for further rate cuts, inflation is likely to trend lower on cheaper oil prices and a good harvest expected this year.
FORWARD LOOKING STATEMENTS
Certain statements made in this article may be forward looking. Actual future results or occurrences may differ significantly from those anticipated in any forward looking statements due to numerous factors. Thomas White International, Ltd. undertakes no responsibility to update publicly or revise any forward looking statements.
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