Improved Global Economic Trends, Stimulus Hopes Spur Emerging Market Equities
Emerging market equity prices advanced during the month of February on signs of improvement in global economic trends as well as expectations about quantitative easing in Europe and Japan. Encouraged by reduced inflation risks after the oil price decline, some of the emerging market central banks have also lowered interest rates in recent months. These steps have helped partly offset concerns about reduced global financial liquidity as the U.S. Federal Reserve prepares to hike its benchmark rates later this year. Meanwhile, further U.S. labor market gains have brightened the outlook for consumer spending and select Euro-zone countries such as Germany are also seeing a revival in retail sales. Exports from emerging countries, especially in Asia and Latin America, are expected to benefit from these trends.
Emerging markets in Europe gained the most during February as the recently announced bond purchases by the European Central Bank could lift demand in the developed countries in the region. Russia and Greece advanced the most, while Turkey declined on concerns about the government interfering in policy decisions of the central bank and other institutions. Markets in Latin America also recovered after declining in earlier months on expectations that governments and central banks in some of these countries would be able to roll out policy measures to address the weak economic outlook. Asian markets also advanced during the month, though gains were more moderate when compared to the other regions.
Manufacturing activity continued to expand in most emerging economies in February, though the pace of growth moderated from the previous month. China, India, Korea and Taiwan reported modest gains in output growth. However, resource exporting countries such as Brazil and Russia, as well as Indonesia and Turkey, continued to see declines. Services output increased further in China, India and Brazil, while Russia reported a decline.
Near-Term Outlook
The Chinese government has lowered its economic growth target for the current year to 7 percent, from about 7.5 percent set for 2014. Relative to the actual growth of 7.4 percent for last year, the new target is not a significant markdown and should be seen in the context of China’s transition to domestic consumption driven growth. Some of the recent data suggests that the government has been fairly successful in managing this gradual shift without causing heightened financial market risks. While the country’s property market remains subdued, fears of a disastrous meltdown in property prices have eased. Accordingly, China’s banking sector has so far not seen a significant rise in bad loans. Domestic consumer demand appears to be healthy as sales of automobiles were higher than expected during the first two months of this year. Exports also appear to be on a rebound, though part of February’s 48 percent jump in shipments was due to the unusually low base of last year. The central bank has cut its benchmark rates again and more reductions are expected later this year, especially if oil prices remain low.
The major commodity exporting countries such as Brazil and Russia continue to face significant economic challenges, despite the moderate rebound in oil prices. To rebuild business confidence, the Brazilian government recently announced a series of fiscal reform measures. However, some of these policies are contrary to the promises made during last year’s presidential elections. As a result, public protests against the reforms are rising and the government could find it difficult to implement some of these necessary policy measures. Meanwhile, most developed countries remain unconvinced about Russia’s strategic intentions even after the recently agreed ceasefire in Ukraine. If the ceasefire does not hold, it is possible that the economic sanctions against Russia could be widened. This could further weaken the Russian economy, which is evidently in a recession now.
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