´Emerging Markets´ - facts and figures

Barings freut sich Ihnen den aktuellen Barings Newsletter "Emerging Markets - facts and figures" zu präsentieren. In dieser Ausgabe liegt der Schwerpunkt auf Lateinamerika. Barings | 08.07.2010 10:25 Uhr
Archiv-Beitrag: Dieser Artikel ist älter als ein Jahr.

Highlights

  • Die Entwicklung der gesamten Emerging Markets hat die der entwickelten Länder im Juni erneut übertroffen.
  • Sorgen über die fiskalpolitischen Probleme in Griechenland und in weiteren europäischen Ländern führte zu einer vergleichsweise schwächeren Entwicklung in den Wachstumsmärkten Zentral- und Osteuropas.
  • Die Notenbanken diverser Emerging Markets (inkl. Brasilien, Chile und Indien) kündigten eine Anhebung der Leitzinsen an.
  • Die People’s Bank of China verkündete eine Liberalisierung ihrer Währungspolitik.
  • Die Regierung Südkoreas plant Maßnahmen zur Reduzierung der Volatilität des Won, der in den vergangenen Monaten vergleichsweise schwächelte.
  • Für Lateinamerika erwarten wir eine starke wirtschaftliche Aufwärtsentwicklung, die das Ergebnis langfristiger politischer sowie wirtschaftlicher Reformen ist.

Review of Emerging MarketsJune 2010, with focus on Latin America

Highlights of the month

  • Emerging markets collectively outperformed developed markets during June, another month which was dominated by investor aversion towards risk
  • Widespread concerns about the fiscal problems of Greece and other European countries caused the emerging markets of Central and Eastern Europe to perform comparatively poorly
  • The central banks of various emerging markets, including Brazil, Chile and India, announced increases in official interest rates
  • The People’s Bank of China announced a liberalisation of the currency regime, which is widely seen as being consistent with a gradual appreciation of the yuan vis-à-vis the U.S. dollar
  • The South Korean authorities introduced measures to reduce the volatility in the won, which has been comparatively weak over recent months
  • Agricultural Bank of China launched what may be the world’s largest-ever Initial Public Offering

Statistical Summary

Global emerging markets in June

Collectively, the emerging markets outperformed their developed counterparts during June, although they lost ground in absolute terms. Investors became more risk averse in a month where headlines were dominated by the fiscal problems of various long-standing members of the European Union. This had implications for the emerging markets of Central and Eastern Europe. However, particular markets elsewhere – such as Brazil – also fell as investors fretted about the slowing of the U.S. economy or other issues. The emerging markets of the Asia-Pacific were comparative outperformers.

Investors in India responded favourably to the Finance Ministry’s announcement in early June which lifted the portion of listed companies’ shares that must be held by the public (i.e. as opposed to a government or strategic shareholder) from 10% to 25%. This measure should boost market liquidity and transparency. According to Bloomberg data, around one-sixth of the 3,000 largest Indian companies will have to issue shares as a result of this new rule. Elsewhere, the government of South Korea revealed plans to limit currency forward trades by domestic banks to 50% of their equity capital. Forward trades by foreign owned banks operating in the country will be restricted to 250% of their equity capital. The government’s objective is to reduce the volatility of the won, which has fallen by about 10% relative to the U.S. dollar over the last three months or so.

Another key development during the month was the announcement by the People’s Bank of China that it would introduce a more flexible exchange rate regime. The yuan has effectively been pegged to the U.S. dollar at a rate of 6.83 for nearly two years. The central bank’s decision was seen as a move towards a gradual appreciation in the yuan, and is consistent with promotion of domestic demand and correction of international current account imbalances. Towards the end of June, Agricultural Bank of China (ABC) announced plans to sell 25.4bn shares in Hong Kong and 22.2bn in Shanghai in an Initial Public Offering (IPO) which, could raise up to US$23bn. If the IPO is successful, it will be the world’s largest, exceeding the US$21.9bn which was raised by Industrial & Commercial Bank of China (ICBC) in 2006. ABC is the last of the “big four” Chinese state-owned banks to mount an IPO.

A number of emerging markets are clearly in that section of the economic cycle where central banks move to tighten monetary policy. At the beginning of July, the Reserve Bank of India, for example, announced that it would increase the repo rate under the Liquidity Adjustment Facility from 5.25% to 5.50%. The central bank lifted the reverse repo rate from 3.75% to 4.00%. In its explanation of its decision, the Reserve Bank of India noted that the economic recovery is consolidating, thanks to favourable conditions in the manufacturing sector and monsoon rains that have been “decidedly better” than those of 2009. The central bank is looking for the economy to achieve real growth in the fiscal year to March 2011 of 8% “with an upward bias” to its projections. However, the Reserve Bank of India is also concerned about  inflation. Wholesale price index (WPI) inflation rose from 9.6% in the year to April to 10.2% in May. Food price inflation and consumer price inflation in India “remain at elevated levels.” Elsewhere, the Monetary Policy Committee (COPOM) of the Banco Central do Brasil voted to increase the benchmark Selic rate by 0.75% to 10.25%.

Region in focus: Latin America

We are looking forward to a strong upward economic cycle in Latin America, based on the benefits of long-term political and economic reform, global demand for the region’s energy and resource exports and the ongoing formation of an expanding middle class. Given the range, quality and valuations of investment opportunities available in the region, current market levels could prove to be an attractive entry point for medium to long-term investors. However, as ever, investors are likely to need to be selective in their investments.

Certainly, Latin America now compares very favourably with the developed world in terms of debt levels. Currently, public debt outstanding in Brazil amounts to a little less than 60% of GDP. In Mexico, the equivalent figure is less than 40%. By way of comparison, public debt in the world’s developed countries currently stands at about 98% of GDP, and is expected by the International Monetary Fund (IMF) to rise to about 118% of GDP by 2014. Across all emerging markets globally, public debt is expected to fall from about 38% of GDP (the level at which it has stood since 2000) to 36%.

In part because of past financial crises and in part because of the general under-development of financial services, the overall level of bank lending in Latin America is low. According to the World Bank, bank credit to the private sector amounts to about 60% of GDP in Brazil and around 30% of GDP in Mexico. In China, South Korea and South Africa, the equivalent figure is 100% or more. The implication is that, in much of Latin America, the banks have considerably greater scope to increase lending to non-bank clients than do their counterparts elsewhere (and, in particular, banks in developed countries). Over the coming decade, it is reasonable to look for lending to grow faster in Latin America than in other parts of the world. This suggests that domestic demand in much of the region should be able to expand comparatively rapidly.

Latin America is sometimes thought of as being substantially a region that supplies raw materials to the booming Chinese economy. While it is true that companies which produce minerals and energy are well represented in Latin American stockmarkets, the regional economic profile is more complex. Of the seven largest economies in Latin America (Brazil, Mexico, Argentina, Chile, Colombia, Venezuela and Peru), the three that are most open to foreign trade are Chile, Mexico and Peru. Merchandise exports from these countries range from about 25% of GDP to 40%. Minerals (particularly copper) dominate the export mixes of Chile and Peru. However, Mexico’s export mix is dominated by manufactured goods (the majority of which are sold into the USA). By most standards, Brazil can be considered to be a large and fairly closed economy. Brazil’s exports equate to about 11% of GDP. Although some countries (particularly Chile and Mexico) have followed the export-led development model favoured by governments in East and Southeast Asia, growth in many of the larger economies in the region (particularly Brazil and Colombia) depends on domestic demand.

The country where we are probably most cautious in the region at present is Brazil. Although the long-term case remains bright in our view, the combination of uncertainty ahead of the general election in October, the need for monetary tightens in Brazil and valuations which are not particularly cheap leaves us with a cautious view at present.

Because of its close links to the US economy through exports of manufactures, the dynamics in Mexico are rather different to those of Brazil or, indeed, other countries in Latin America. In spite of Mexico’s well publicised political and security problems - and the challenges facing economic policy-makers in the USA - it appears that Mexico is approaching a point from which domestic demand will grow steadily. Over the long term, there is a close correlation (as one would expect) between total wages paid to workers and retail spending. Over the last eight months or so, industrial employers have become much more confident. As a result, formal employment – which was contracting sharply in early 2009 – is rebounding. Employment is also growing outside Mexico’s manufacturing sector. Total wages and retail spending have begun to recover. As noted above, the overall level of bank lending is low. This means that Mexican consumers have the potential to increase spending faster than their incomes by borrowing: this is the opposite of the conditions that now apply in much of the developed world.

Elsewhere, Peru and Colombia are countries that could – and should – benefit from improved perceptions of risk over the coming years. Over the last year or so, inflation in Peru has fallen so that it is back in the central bank’s range of 1-3%, which is where it was for the three years to early 2008. Peru’s economy contracted slightly in 2H09, thanks to the global financial crisis: however, GDP growth should be in the vicinity of 5.5% in 2010 and 2011. Peru is well-placed to benefit from the long-term development of China.

However, the growth in domestic credit means that investment and consumer spending should also contribute to the expansion of the economy. Inflation has also fallen in Colombia. The economy contracted marginally over the year to September 2009, but has since started to grow again. The security situation is improving. In the wake of Juan Manuel Santos’ victory in the recent Presidential election, economic policy should remain stable and positive.

In Chile, the central bank announced a larger than expected 0.50% increase in the key policy rate to 1.00% in June 2010. This indicates that – in contrast to most developed countries – Chile has reached the point in the economic cycle where monetary policy is tightened. Nevertheless, it is important to note that headline Consumer Price Index (CPI) inflation is barely above 0%, having been 8-10% for much of 2008. Fiscal spending, funded from Chile’s Economic & Social Stabilisation Fund (ESSF) – which is designed to offset the impact on the economy of swings in the price of copper, will be accelerated by reconstruction following the earthquake of 27 February 2010.

Whether or not Latin America realises its potential over the longterm will depend on governments’ ability to deal with multiple challenges. These include: infrastructural bottle-necks; financing of social security; tax systems that are often complex challenges in education, and; the need to keep the overall cost of capital low and stable. Although lack of space precludes a detailed discussion of these issues, we note that progress has been made on most fronts in the majority of the countries.

It is also possible to identify factors that may contribute to volatility in regional financial markets over the next two years or so. For instance, it is unlikely that Latin American markets would be completely unscathed in the event that the fiscal problems of developed countries led to a new crisis of confidence in the global financial system. Perceptions of the likely growth of the region would also be harmed in the event that a tightening of monetary policy by the People’s Bank of China leads to a sharp slowing of that country’s economy. At some stage, a tightening in policy by the US Federal Reserve – and/or renewed strength in the US dollar – may also pose a challenge. As ever, domestic political issues may have an adverse impact on investor sentiment in particular countries from time to time.

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