Equities See Modest Upside as Concerns about a Global Economic Slowdown Subside
After a weak start to the year, emerging market equity prices recovered in February as concerns about slower than expected global expansion and a further decline in Chinese economic growth subsided. Though U.S. GDP growth for the last quarter of 2013 has been revised lower, the improvement in business investments and the steady pace in consumer spending have been positive. Along with the Euro-zone economy that also gained speed during the last quarter, the healthy outlook for the developed world is expected to help sustain export demand for the emerging countries. Markets such as Indonesia and South Africa, which had fallen out of favor last year, were among the biggest outperformers during February. Most Latin American markets, except Mexico, recovered during the month, while in Europe, Greece and Poland saw the most gains.
January trade data from China was stronger than expected and the trade surplus widened. India also saw gains in exports during the month of January, but exports from Indonesia declined as the country continues to restrict shipments of mineral ores. Korea has also reported modest gains in exports during the first two months of this year, but factory production unexpectedly declined in February. Manufacturing output data from China remained subdued as one of the surveys suggested further contraction in output. India and Turkey reported faster growth in factory production while Indonesia and Brazil continued to expand, though at a slower pace when compared to the previous month. GDP growth in India and Thailand during the last quarter of 2013 was slower than expected, while export gains helped Malaysia expand at a faster pace. In Latin America, Brazil expanded faster than expected during the last quarter but persistent inflation risks forced the central bank to hike interest rates again.
Near-Term Outlook
Harsh winter weather likely disrupted normal economic activity in some of the developed countries in recent months, and it is expected that both business and consumer spending would improve in coming months. Recent surveys suggest improved consumer sentiment in both the U.S. and Europe, which could lift the outlook for exports from the major emerging economies. In addition, the brighter outlook for consumer spending will likely encourage businesses in the developed world to consider additional investments in capacity. The uptick in hiring and increased construction activity could boost domestic demand further in developed countries, and help sustain export growth for the emerging countries. Currencies of several emerging countries are at substantially lower levels against the U.S. dollar and the Euro, when compared to last year, and remain favorable for exporters.
Nevertheless, the outlook for emerging market countries that are predominantly exporters of natural resources remain relatively more subdued. Despite the improved global outlook, prices of industrial commodities have not recovered. In fact, prices of iron ore and copper have trended lower since the beginning of the year. The prospect of increased supplies, the result of heavy investments in mining capacity during the commodity boom, could restrain prices this year even if demand picks up further. Only the energy exporters are seeing price gains, as geopolitical uncertainties have lifted crude oil and extreme winter weather in the northern hemisphere has pushed natural gas prices higher. However, prices could ease if the political crisis in Ukraine doesn’t escalate into a military conflict and as the seasonal demand for natural gas eases.
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