Equity Prices Fall over Concerns about China, Resource Exporters
Emerging market equity prices declined further in September, as fears about slower global economic growth persisted. External trade data from China was weaker than expected and accentuated investor concerns that the world’s second largest economy could miss current growth targets. Nevertheless, retail sales in China continued to expand at a healthy pace in August as the central bank’s interest rate cuts and other policy measures lifted domestic consumer sentiment. Among other large emerging countries, the central bank in India lowered its benchmark rate more than expected in September. Inflation in India remain below the central bank’s target and select economic growth trends have been slightly softer than earlier forecasts. In contrast, central banks in Brazil and South Africa have increased interest rates in recent months to curb inflation risks. Markets in Latin America declined the most during the month of September, followed by Europe. Asia outperformed, helped by modest gains in Korea and India.
Manufacturing activity weakened across most emerging economies, including China, Korea, Taiwan, Indonesia, Brazil, Greece, Turkey and Russia, during the month of September. India was the only major emerging economy to report an expansion in factory output, though the pace was lower when compared to the previous month. However, new export order flows were healthier for select countries such as Mexico, Turkey and India. Services sector activity growth was more positive in most emerging markets, including China and Russia. However, Brazil saw a further decline in services output during the month.
Near-Term Outlook
The outlook for economic growth in emerging countries appears to be stabilizing, though the trends from the large commodity exporting countries remain weak. Low prices of energy and industrial commodities could further reduce import costs and strengthen the external trade accounts of countries such as China, India and Indonesia. As global demand is expected to improve in the coming months, several countries in Asia and Latin America could see a revival in export growth. Their cheaper currencies may add to the export revival as shipments have become more competitive in the global markets. The recent fiscal and monetary policy measures announced in some of these countries should also support consumer demand. As well, low inflation and relatively healthy government fiscal balance should allow some of the large emerging countries to sustain monetary and fiscal policies that support growth.
The large resource exporting countries such as Russia and Brazil are likely to see recessionary conditions persist for the next few quarters, unless there is a sharp recovery in energy and commodity prices. The International Energy Agency (IEA) expects the crude oil market to remain oversupplied for most of 2016. However, producers of select industrial commodities have started cutting output and the lower supplies could help stabilize their prices.
The U.S. Federal Reserve’s decision not to hike interest rates in September has eased fears about lower capital flows to emerging markets. As the subsequent U.S. economic data, including retail sales, have been softer than expected, it appears more likely that the Fed will consider its first rate hike only in December or early next year. This could encourage the European Central Bank and the Bank of Japan to increase the scale of their ongoing quantitative easing programs.
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