Interestingly enough, on the whole share prices in the Emerging Markets were not really able to profit from this. Although more strong gains were seen for some markets (e.g. China, Hungary, Russia, Thailand, Philippines), at the end of January the MSCI global index for the Emerging Markets only reflected a minimal gain compared to one year earlier. Consequently, the relatively stronger price performance in the Emerging Markets compared to the established equity markets has come to an end, at least for now. Of course, this may not be the last word in the EM story. Nonetheless, the sub-average performance of the Emerging Markets in the midst of extremely positive risk sentiment at the global level should be taken as a warning sign, at least for the weeks and months ahead. This is even more so the case, because share prices of Small Caps (which are generally very dependent on domestic economic performance) in the Emerging Markets have performed significantly weaker than those in the established industrialised nations. The materials and industrials sectors were among the weakest equity market segments in January, and for several months no tangible gains have been registered in prices of industrial metals, which are very sensitive to economic growth developments. As these markets and market segments should number among the main winners during any stronger economic upturn in the near future, the relatively lacklustre price performance can also be interpreted as another warning sign.
At the same time, in terms of economic performance, the mild recovery in activity has continued in many EM countries. In terms of the largest Emerging Markets, this is mainly true for China, but here again the trends on the equity market do not really fit in well with the positive official economic data being released. In this market, it has mainly been banks and real estate companies that have been the big winners, in line with with the pick-up in real estate market activity that has been registered. By contrast, miners and industrials have limped behind the market as a whole. In some of the large EM countries, such as Brazil or India, however, there are still no signs of acceleration in economic growth right now. In the Asian region, another reason for caution is that the recent depreciation of the Japanese yen means that Japanese exporters are significantly more competitive again compared to their peers in the region, such as Korea.
EM bonds continue to enjoy support from strong inflows of capital. The upward trend in currencies and yields is slowing down however, which comes as little surprise because from a valuation perspective there is now rather limited potential going forward. Similar to the situation in equities, there are mounting expectations of a setback for this asset class as well. Nevertheless, the long-term outlook, i.e. over a horizon of several years, for the equities, bonds and currencies of most EM countries is still positive.
Read the entire report in the attached .pdf document.