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EMs suffer on US and Euro uncertainty
20 August 2013
Developed market recovery will have "modest" impact on emerging markets, warns Raiffeisen Capital Management
Despite a stabilisation in bond and equity princes in July after two months of declines, the US and Chinese economies continue to dominate the outlook for emerging markets (EM), according to Raiffeisen Capital Management.
The firm said that while the MCSI Emerging Markets Index increased by around 1% in July, growth remained lower than the MSCI Global index, with the effect of the end of QE in the US and the weakening outlook for the Chinese economy acting as a brake.
But Raiffeisen warned that while a recovery in the US and Europe should feed through to support emerging markets, it thought the effect may actually be “quite modest”.
The firm argued that as EM economies were now a larger part of the global economy than in past decades, the decoupling effect between emerging and developed markets would be more pronounced, with both positive and negative consequences.
It noted that while many emerging markets were relatively sheltered from the effects of the US housing market crash at the height of the crisis, “it appears unlikely that the current rebound on the US housing market will be able to lift up the EM economies”, while Europe's “sluggish upturn” would be too little and too weak to have any effect outside of Europe.
The firm said that it felt fears over a Chinese slump were overstated, and while a further slowdown in growth was likely, moves by the Chinese authorities to back stimulus efforts and a less restrictive approach from the Chinese central bank would support the economy.
It added that while it was uncertain whether EM equity prices had bottomed out, there were indicators and factors that suggested there was further to fall.
“Investor sentiment is not yet pessimistic enough - and is nowhere near rock bottom - and the commodity markets could also suffer further setbacks, in particular the oil price, which has recently shown absolutely no reaction to developments in the rest of the commodities sector, which is very unusual from a historical perspective.”
Raiffesisen said that while another plunge in EM share prices was not inevitable,”it does not appear that this current weak phase has reached its end”, although certain countries, such as Brazil, looked to be on the upswing.
On Brazil, the firm said industrial and capital goods production were expected to start rising again, although inflation had negatively affected consumer spending, and forced the central bank to raise interest rates by 50 basis points to 8.5%.
“While one can certainly applaud the consistency of the central bank in recent months, the question remains as to whether the recent rate hikes may not be too much of a good thing, in light of the fragile economic situation,” the firm said.