Emerging Markets
Strengths
- Indonesia’s GDP expanded 5.7 percent in the first quarter year over year and accelerated from the fourth quarter’s 5.4 percent growth. Drivers were continued recovery in consumer spending, investment and exports to China.
- Market expectations rose for a credit rating upgrade for The Philippines after Moody’s Investors Service said the apparent victory of Benigno Aquino in the presidential election sets a favorable tone for the nation’s fundamentals.
- South Korea’s central bank left the benchmark interest rate unchanged at a record-low 2 percent for a 15th month due to uncertainties associated with the European debt crisis. Unemployment rate dropped for a third month to 3.7 percent in April.
- Eastern European stock markets staged a considerable rally this week, sparked by the $962 billion sovereign debt loan plan put together by the European Union. Hungary rose more than 8 percent after falling more than 13 percent the week before. Turkey and Russia also rose sharply.
- Russia is emerging from the global recession. First-quarter GDP rose 2.9 percent, and while this was below estimates, it was the first positive growth since the third quarter of 2008.
- Mexico, Brazil and Turkey all experienced currency appreciation this week as investors reconsidered the potential impact of European problems.
Weaknesses
- China’s consumer prices rose a higher-than-expected 2.8 percent year over year and 0.2 percent month over month in April, as not only food prices increased, but non-food prices picked up as well.
- Average selling prices of residential and commercial properties in 70 cities in China rose a record 12.8 percent year over year in April, with new home prices rising 15.4 percent.
- China’s industrial production growth decelerated to 17.8 percent year over year in April from 18.1 percent in March, reflecting a moderation in fixed-asset investment and auto sales. Passenger car sales growth slowed to 34 percent year over year in April from 63 percent in March, reflecting a 12 percent month-over-month decline.
- European austerity measures are likely to slow Western European growth, which hurts many of the export-oriented countries in Eastern Europe.
- While stock markets generally rallied this week, currencies with ties to European growth prospects sold off by the end of the week. The Hungarian forint, Czech koruna and several other small Eastern European currencies fell by 2 percent or more.
Opportunities
- Four consecutive months of strong year-over-year recovery in China’s exports was probably a major factor that reassured and encouraged Chinese policymakers when they announced anti-property speculation policies in mid-April. Going forward, intensifying risks in Europe, China’s largest trading partner, may eventually impact China’s exports. In fact, the three-month trend of China’s imports, a leading indicator of future exports, has already headed down. Should a meaningful export deceleration occur in the intermediate term, Chinese authorities may reverse policies to protect economic growth.
- Macro factors have become the driving force in the market over the past few weeks, with sentiment shifts creating wild market swings that often provide opportunities.
Threats
- The market environment in China has evolved this year under a tighter policy stance. Faster GDP growth and slower money supply expansion combined to reduce the country’s excess liquidity, which has typically led domestic stock performance in the past decade. If this relationship holds, caution should still be in order for Chinese stocks in the near future.
- The threat of sovereign debt contagion has not been fully removed and may lead to more downside volatility in the coming weeks.
