After the strong relative performance towards the end of last year, emerging market equities settled with moderate gains during the month of January as global investor sentiment remained optimistic. Global economic data continue to be mostly positive, sustaining the trend from the second half of last year. Though oil prices have moved higher, inflation data from the major economies remain benign and have sustained expectations that central banks would have enough flexibility to maintain low interest rates. The temporary suspension of the U.S. government debt ceiling has helped ease concerns over a political stalemate and the consequent economic growth risks for the time being. Corporate earnings growth appears to have improved as several global corporations reported better than expected earnings for the fourth quarter. Revenue and earnings growth for the most recent quarter reported so far by the large emerging market companies has also been healthy.
GDP growth data released so far for the fourth quarter of 2012 have mostly been healthy for the major emerging economies, except Korea and Russia. In China, economic growth recovered as expected, helped by higher investments and domestic consumption. The pace of growth in Taiwan and the Philippines exceeded expectations, while Indonesia saw sustained growth above 6 percent annualized, despite relatively weak commodity exports. Growth in Korea accelerated during the last quarter, but still fell below expectations as exports remained weak. Manufacturing output data from the emerging economies showed steady expansion for the month of January in most countries, and across regions. In countries such as Brazil and Korea, which faced many headwinds during last year, factory output has seen signs of recovery.
Near-Term Outlook
The unexpected economic contraction reported by the U.S. and the U.K. during the fourth quarter of last year briefly raised questions about the sustainability of the ongoing global growth recovery. Current year GDP growth forecasts for the emerging economies are mostly based on the presumption that the U.S. economy will accelerate moderately, while Europe will not be any worse than last year. Slower than anticipated growth, especially in the U.S., would delay the expected revival in export demand for the large emerging countries. However, the decline in U.S. economic output was mostly due to a substantial fall in government spending and lower inventory gains. These factors are not expected to persist, unless U.S. lawmakers fail to avoid automatic spending cuts scheduled for early March and arrive at an agreement before the debt ceiling becomes applicable again in May. Nevertheless, as inflation risks remain contained, most emerging countries continue to have sufficient fiscal and monetary flexibility to introduce additional stimulus measures to support domestic demand.
The prospect of a currency war, or competitive currency devaluations, between the major economies has attracted investor attention in recent weeks. The appreciable correction of the Japanese yen, following the more aggressive fiscal and monetary stimulus measures, is thought to be adversely affecting the export prospects of emerging countries such as Korea that compete directly with Japan in sectors such as electronics and automobiles. The Korean won continues to retain most of the gains from 2012, despite this month’s moderate correction, and currency strength was one of the factors that contributed to a decline in the country’s exports last year. The Brazilian real, Indian rupee, Mexican peso, as well as most East European currencies, have gained against the U.S. dollar this year, while the decline of South African rand has been notable following the country’s credit rating downgrade. Brazil, which has been vocal in the past about the loss of export competitiveness due to currency gains, has again stated its readiness to consider regulatory measures to prevent further appreciation. The possibility of additional countries resorting to aggressive measures aimed at currency devaluation has increased, especially since the ongoing recovery in global demand remains fragile. However, in this era of global manufacturing with component sourcing from all over the world, estimating the net effect of cheaper currencies on exports and domestic inflation is likely to be difficult.
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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