Posts Tagged: emerging markets

 

Hong Kong-01 July 2015: Emerging Asia will continue to experience relatively high rates of growth over the medium term as economic prospects remain starkly divergent across emerging markets, according to Fitch Ratings’ latest Global Economic Outlook report. Growth should improve steadily through to 2017 for emerging Asia excluding China on aggregate. This should occur even as China continues to experience a gradual structural slowdown.

Differing exposures to key global macro trends – including the fall in commodity prices and likely rise in US interest rates, as well as country-specific factors – will continue to contribute to substantial differentiation in growth rates in emerging markets over the next few years. Fitch forecasts aggregate growth in emerging Asia excluding China to accelerate to 6.7% in 2016 from 6.4% in 2015, although robust Indian growth masks a weaker performance relative to the recent trends in other large regional economies such as Indonesia and Malaysia. Fitch forecasts China’s growth to slow to 6.8% in 2015 and 6.5% in 2016 as rebalancing continues. 

The region’s performance is projected to be markedly stronger than in other big emerging markets. Russia and Brazil are forecast to record substantial contractions in GDP in 2015 (-3.5% and -1.5%, respectively), followed by a weak recovery in 2016 and 2017. 

India will be key in lifting the aggregate regional growth rate, accounting for almost half of the forecast growth for the region excluding China. Notably, Fitch expects that India’s GDP growth rate this year will surpass China’s for the first time since 1999, forecasting an acceleration to 8.1% in 2016 (FY17) before settling back to 8.0% in 2017 (FY18). The implementation of structural reforms and resulting pick-up in investment remain key themes for India’s growth outlook, and recent data confirm the strengthening demand.

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Never mind the Brics or the Fragile Five — the Picts is the new emerging market group investors should worry about as they look ahead to US interest rate rises.

Analysts are divided on whether the Greek crisis will have much lasting impact on EM assets, though few doubt it has racked up the tension. What they do agree on is that the overriding focus for markets in the second half of the year will be the US Federal Reserve.

Predicting what the Fed will do and how investors will react has thrown up its own sub-genre in the business of EM research.

JPMorgan set the standard during the “taper tantrum” of 2013 by identifying the Fragile Five, also known as the Biits — Brazil, India, Indonesia, Turkey and South Africa — that were most exposed to the beginning of the end of the Fed’s $85bn a month asset buying programme, or quantitative easing. They were marked out by having large or poorly financed current account deficits, high rates of inflation and other imbalances.

Richard Iley, chief EM economist at BNP Paribas, added to the genre last week by telling investors to beware the Picts — Peru, Indonesia, Colombia, Turkey and South Africa — which he says are now the most vulnerable as the Fed, having done with QE, prepares to raise interest rates for the first time since 2006. He ranked 16 big emerging markets from 1 to 16 on 20 macroeconomic variables and totted up the scores. The Picts came out the worst.

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The problem with emerging markets

14 June 2015 - 9:44 am
 

It was not too long ago that the emerging markets were regularly eulogised as the permanent powerhouses of the world economy. During the 2000s, with excitable neologisms like Brics (Brazil, Russia, India, China, South Africa) coined in their honour, the big emerging economies drove a boom in global output and trade.

And when the rich world suffered a dislocating shock during the financial crisis in 2008, many middle-income nations, with relatively resilient banking systems and large foreign exchange reserves, rode out the turbulence and rapidly resumed growing.

That euphoria, which has been subsiding for years, is now at a low ebb. This week the World Bank warned of a “structural slowdown” as developing nations ceded the leading role on global growth to the rich world. A decline in import demand means emerging markets subtracted from world trade growth in the first quarter of this year for the first time since 2009.

In reality, weaknesses within the emerging world have been evident for some time. Few countries have built the kind of diverse high-productivity economy that will propel them into the first rank of rich states.

According to a study by the International Monetary Fund, the slowdown in trend growth in middle-income countries has been in train since the crisis. For years, weak productivity improvements were masked by low interest rates, helped by quantitative easing in the US, and by high commodity prices.

Those props are now being kicked away and, with the US Federal Reserve yet to raise rates, there may still be a bigger squeeze to come. The growth model of countries like Brazil has been exposed. Chronic deficits, high inflation and an overvalued exchange rate have left the country with no alternative but tighter monetary policy and a recession. The evaporation of a favourable external environment exposes the past failure to reform. One or two leaders, such as Narendra Modi in India and Joko Widodo in Indonesia, are belatedly trying to reorient government spending away from wasteful subsidies and towards productive investment, but it will take time.

The process of poor countries getting rich, much of which used to be driven by export-led manufacturing, has become more complex. Emerging economies are routinely turning away from manufacturing at much lower levels of income than earlier waves of industrialisers. An apparent structural fall in trade growth relative to overall expansion, probably as a result of nations like China taking more of their supply chains in-country, means less chance for other developing countries to export their way to prosperity. >> Read More

 

The Chinese A-share market is now the world’s most heavily traded. But it is disconnected from trading in the rest of the planet. It is like a whale, thrashing in a small tub of water.

Everyone now acknowledges that this cannot continue much longer. And so this week was dominated by arguments over how, and how quickly, the Chinese whale can be introduced into the sea of global markets. But that requires big changes in the behaviour both of China’s authorities and of investors.

Both sides are, correctly, nervous that the Chinese whale could displace a lot of water. And in return for opening a big new conduit for foreign capital, Chinese authorities will have to relax their control over their domestic market.

The issue of A-shares, the category of shares that with a few exceptions is still restricted to domestic Chinese investors, also shines a light on the dominant role that indexers now play. No longer passive, they are unavoidably active players, driving many trillions of dollars.

This week MSCI, the biggest indexer of international markets, announced its annual review of the members of its emerging markets index, used as a benchmark by funds with $1.7tn in assets. Not only index funds but any nominally active fund that uses the MSCI EM as a benchmark is, in practice, obliged to shift its holdings in response to the review. China, through shares quoted in Hong Kong, makes up 25 per cent of the MSCI EM. That would rise to more than 45 per cent if A-shares were included.

MSCI consulted on admitting A-shares to this index, at a weighting of only 5 per cent of their total market value, and came under passionate lobbying from all sides. >> Read More

 

Developing countries are facing a “structural slowdown” likely to last for years and are ceding their role as the world’s growth engine to more mature economies such as the US, according to the World Bank.

The Washington-based bank on Wednesday lowered its forecast for global growth this year to 2.8 per cent, partly because the much-anticipated benefits of lower oil prices have been limited.

Seven years after the global financial crisis, high-income countries were resuming their role as drivers of international growth, the World Bank said in its twice-yearly report.

By contrast, with the exception of India and a few others, the bank warned that developing economies such as China must confront an era of slower growth.

The bank’s intervention comes amid mounting evidence that the steady boost the world economy has derived for years from the rise of countries such as Brazil and China is becoming a drag. >> Read More

 

MSCI has not decided to include China stocks in its index yet – as opposed to what mainstream media believes. MSCI instead says the inclusion is “on track” for inclusion but thereremains three significant hurdles including liquiidty restrictions.

Full MSCI Statement on China inclusion:

MSCI, the premier provider of global equity indexes, announced today that it expects to include China A?shares in its global benchmarks after a few important remaining issues related to market accessibility have been resolved. MSCI and the China Securities Regulatory Commission (CSRC) will form a working group to contribute to the successful resolution of these issues.

“Substantial progress has been made toward the opening of the Chinese equity market to institutional investors,” said Remy Briand, MSCI Managing Director and Global Head of Research. “In our 2015 consultation, we learned that major investors around the world are eager for further liberalization of the China A?shares market, especially with regard to the quota allocation process, capital mobility restrictions and beneficial ownership of investments.”

Briand continued, “Because MSCI’s client base is so large and diverse, we have a strong interest in ensuring that remaining issues are addressed in an orderly and transparent way.  We are honored that the CSRC has recognized MSCI’s expertise regarding the requirements of international institutional investors. We look forward to a fruitful collaboration that will contribute to the further opening of the China A?shares markets to international investors and the inclusion in the MSCI Emerging Markets Index.”

MSCI stated that it may announce the decision to include China A?shares in the MSCI Emerging Markets Index as soon as the issues it has outlined are resolved. This may happen outside the regular schedule of its annual Market Classification Review. >> Read More

 

Just like footballers before the World Cup final, central bankers in emerging markets are readying themselves for the biggest test of their careers: the first rate increase in nearly a decade by the US Federal Reserve.

The timing of this momentous event is uncertain, and disappointing data since the start of the year has made US monetary policy makers more cautious than they were just a few months ago. However, Janet Yellen, Fed chairwoman, remains confident the economy will strengthen and rates are likely to go up this year.

When the Fed eventually moves, economists believe a rate rise is bound to provoke large capital outflows away from Latin America and Asia. This will test the defensive strategies local policy makers have built throughout the long era of ultra-low rates.

“I don’t think emerging market central bankers can ever be properly prepared,” says Simon Quijano-Evans, emerging markets analyst at Commerzbank. “They have accepted that if it does happen, they will just have to deal with it.”

Their first line of defence includes interest rates, which central bankers can increase to persuade investors to stay put rather than moving their money to the US. >> Read More

 

India has slipped six places to rank 89th on a global Networked Readiness Index, showing a “widespread” weakness in its potential to leverage information and communications technologies for social and economic gains.

While Singapore has replaced Finland on the top of the 143-nation list, prepared by World Economic Forum (WEF), it has called for improvement in India’s business and innovation environment, infrastructure and skills availability.

However, India has been ranked on the top globally on a sub-index for competition and affordability.

Overall, India was ranked 83rd last year, and even better at 68th position in 2013.

WEF said India’s weakness is widespread, falling in the bottom half of seven of the 10 pillars of the index.

“Major areas that need improvement, according to our analysis, are the country’s business and innovation environment (115th out of 143), infrastructure (115th) and skill availability (102nd).

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Faced with recession, decade- high inflation, a fiscal crisis and water rationing, more than 1m Brazilians took to the streets last month to protest against corruption and mismanagement in their government. In China, growth is slowing as property prices fall, propelling more than 1,000 iron ore mines toward financial collapse. The patriotic citizens of Russia, meanwhile, are deserting their nation’s banks, switching savings into US dollars.

Such snapshots of growing distress in the world’s largest emerging markets are echoed among many of their smaller counterparts. Several countries in Sub-Saharan Africa are beset by dwindling revenues and rising debts. Even the turbo-powered petroeconomies of the Gulf, hit by a halving in the price of oil over the past six months to $55 a barrel, are moving into a slower lane.

Though these expressions of distress derive from disparate sources, one big and insidious trend is working to forge a common destiny for almost all emerging markets .

The gush of global capital that flowed into their economies in the six years since the 2008-09 financial crisis is in most countries now either slowing to a trickle or reversing course to find a safer home back in developed economies.

Highest outflows since 2009

On an aggregate basis, the 15 largest emerging economies experienced their biggest absolute capital outflow since the crisis in the second half of last year, as a strong US dollar drove emerging market currencies into a swoon and investors grew nervous over the prospect of a tightening in US monetary policy, according to data compiled by ING. At the same time, low commodity prices slammed GDP growth rates across the developing world.

These trends, analysts say, signal a “great unravelling” of an emerging markets debt binge that has swollen to unprecedented dimensions. Importantly, the pain inflicted by this capital flight is being felt beyond financial markets in the real economies of vulnerable countries and in a surging number of emerging market corporations that are forecast to default on their debts.

“Certain parts of the world are looking really vulnerable,” says Maarten-Jan Bakkum, senior emerging market strategist at ING Investment Management. “Places like Brazil, Russia, Colombia and Malaysia, that rely heavily on commodity exports, are going to get hit even harder, while those countries that have borrowed most excessively like Thailand, China and Turkey also look risky.” >> Read More

Reserves in emerging markets shrink

01 April 2015 - 6:35 am
 

Foreign currency reserves in emerging markets fell last year for the first time in two decades, as developing economies found themselves beset by waning competitiveness, capital outflows and concerns over US monetary policy.

Nine out of 10 emerging market economists polled by the Financial Times said emerging markets had passed a period of “peak reserves” and might continue to see their stashes of foreign currency shrink for months.

That decline could hamper emerging economies’ ability to carry on buying US and European debt, a trend that has been an engine of growth in the west over the past decade.

“We are past the peak forex reserves in emerging markets,” said Maarten-Jan Bakkum, senior emerging market strategist at ING Investment Management. “The peak was in June last year. Since then we have seen declines in all major EM countries apart from Mexico, India and Indonesia.”

The International Monetary Fund said on Tuesday that total foreign currency reserves in emerging and developing economies fell $114.5bn year on year in 2014 to $7.74tn — the first annual decline since the IMF data series began in 1995. At their peak, emerging market reserves reached $8.06tn at the end of the second quarter last year. >> Read More

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Baroda, India.