Commodity Exporters Underperform, Offset Equity Price Gains in China
Emerging market equity prices saw a moderate correction during the month as markets in Latin America and Europe slipped. Countries where exports are dominated by energy and commodities saw the worst declines as oil prices continued to tumble. Colombia, Mexico, and Brazil underperformed the most in Latin America, the region most exposed to energy and commodity exports. Elsewhere, Russia and Malaysia also declined substantially during the month. On the positive side, Chinese equity prices continued to see large gains as investors became more confident that the country’s economy has stabilized and the current growth rate is sustainable. Among other Asian markets, India, Taiwan, and Thailand also outperformed during the month. As well, Turkish equities appreciated substantially on expectations that further political stability would lead to reforms and improved economic growth.
After the sustained gains in recent months, Chinese export growth slowed during the month of November. Imports into China declined, partly due to lower energy and commodity prices. Exports from Korea were also lower during the month, as strong gains in shipments to the U.S. could not offset the decline in exports to China and Europe. Exports from India dropped in October while Taiwanese exports continued to exceed expectations in November on strong demand for electronic devices. Manufacturing activity growth moderated across most emerging markets although output gains were above expectations in India and Mexico. Chinese factory activity saw only marginal gains in November. Manufacturing output continued to fall in Korea, but at a slower pace when compared to the previous month. Russia and Brazil also reported declines in factory output, as expected.
Near-Term Outlook
The Chinese economy expanded at a faster than expected pace during the third quarter and the outlook has turned brighter in recent months. The steep fall in oil prices would widen the country’s trade surplus and stimulate domestic demand. Though the government has not announced new fiscal stimulus measures, lower energy costs could give more flexibility to increase public spending without fueling inflation. The Chinese central bank has recently cut its benchmark rate, and is expected to lower the rate again next year. More affordable borrowing costs could reverse the decline in credit growth and limit a further drop in the country’s property markets. Stronger U.S. demand could lift export gains for China in the coming months, even if Euro-zone demand remains subdued.
The outlook for select other countries such as Korea, India, and Indonesia could improve further, if export demand picks up and oil prices remain at current levels. South Korea is likely to be one of the largest beneficiaries of cheaper oil as the country imports almost all of its energy. Indonesia and India also rely on imports to meet the bulk of their energy demand, and the governments in both countries are using the fall in oil prices as an opportunity to restructure and reform their energy markets.
On the other hand, lower energy prices are likely to substantially weaken the economies of resource exporters. Russia is expected to be the worst affected as its economy has likely slipped into a recession. The steep fall in its currency, as well as economic sanctions against the country have pushed up import costs for Russia, and the central bank has hiked interest rates substantially. Mexico, where oil export revenues are a major funding source for the government, could see lower public spending next year. Nevertheless, increased U.S. demand for manufactured goods could offset some of the losses for Mexico.
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