Equities Gain as Currencies Remain Stable and Data Trends Show Positive Signs
Emerging market equity prices saw sustained gains in October as investor optimism improved and most markets saw healthy investment inflows. Concerns about tapering of bond purchases by the U.S. Federal Reserve eased further as the two week U.S. government shutdown in October was widely expected to have restricted economic activity. Signs of further improvement in the major European economies, Germany and the U.K. in particular, also helped strengthen hopes of export gains for emerging economies. Emerging market currencies were relatively stable during the month and helped sustain investor confidence. Among the major emerging markets, India, Indonesia, Brazil, and Thailand saw the biggest gains during the month.
Economic data trends from most emerging economies showed positive signs during October. Manufacturing output growth rebounded across all major countries except India, where activity appears to have stabilized after the decline in earlier months. New order flows and export orders continue to be positive, suggesting the sustained improvement in global demand. The services sector also saw expansion across most emerging economies during the month.
Near-Term Outlook
The outlook for some of the emerging economies that appeared to be facing significant macroeconomic headwinds in August has seen moderate improvement recently. Steps taken by governments and central banks in countries such as India and Indonesia have helped prevent further deterioration of their external account balances. Their currencies have stabilized after the sharp drop during the third quarter, but remain lower against the U.S. dollar and other major currencies when compared to the levels during the first half of this year. The cheaper currencies have restricted import growth while at the same time making exports more competitive, helping these countries to improve their current account deficits. The political environment in countries such as Turkey and Brazil appears to have become less volatile, though some of the problems that led to public protests remain unaddressed.
As domestic demand growth is likely to remain constrained in most emerging economies, due to higher interest rates and liquidity tightening by central banks, export gains are likely to become the major driver of aggregate growth. Recent export trends from Asia have been mostly positive, led by China which saw a strong rebound in October shipments after the unexpected weakness during the previous month. Exports from South Korea have been robust in October while India has also seen improvement in recent months. In Latin America, Mexico continues to see gains in exports of manufactured goods, automobiles in particular. Brazil has also seen healthy growth in shipments of iron ore, its major export, during the month of October. However, the prospect of bond purchase tapering by the U.S. Fed could keep commodity prices relatively subdued and limit export growth for countries such as Brazil, South Africa, and Russia.
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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