Emerging Markets Report - September 2010
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16 Septembrie 2010 |
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RAIFFEISEN BANK S.A. |
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Regional overview
Another setback on the developed equity markets – weak economic performance in the USA is fuelling worries about a new recession and deflation like in Japan
Following the sharp increases in share prices in July, markets suffered another setback in August, although much of the losses were recouped towards the end of the month again. The debt crisis in relation to Greece and other Southern European countries is still simmering, even though it is no longer headline news. Long-dated Greek government bonds are pricing in a strong probability that Greece's public debt will be restructured. Right now, however, one of the dominant topics on the developed equity and bond markets is the persistent weakness of the US economy and the mounting risk of a so-called "double-dip" recession. In light of the sharp downward revision of US growth figures for Q2, it is becoming increasingly obvious that the economic rebound in the USA is very sluggish, despite the unprecedented economic stimulus packages passed by Washington and the central bank's extremely expansive monetary policy. The broadly quite positive quarterly results of exchange-listed companies stand in stark contrast to the economic data. Companies are earning better than ever. At the same time, unemployment remains stubbornly entrenched just below the 10% mark, and the real estate market is also in freefall again, as tax incentives have come to an end. Together with the persistent disinflationary trends in the USA and Europe, this has fuelled more demand for US and European government bonds.
Strong gains for government bonds in the USA and Europe – yields frequently hitting record lows
At the short-end, real yields are in negative territory and even at the very long-end the levels of nominal yields are hardly higher than the average historical rates of inflation for recent decades. The question of whether there will be weak, but nonetheless positive economic growth in the USA in the coming quarters, or whether the economy will actually slip into a recession again will probably only be answered definitively in the months ahead, especially since political decisions can also have a significant impact. As a result, the financial markets are almost certain to see high volatility in the coming months.
Eastern European economies are still on track for recovery, but export growth is faltering
CEE economies, in particular Poland and the Czech Republic, showed more strong signs of recovery. The situation is also looking very good in Turkey. The resurgence in industrial production in the "old" EU member states is having a positive impact on the Eastern European economies and fuelling stronger exports. More intensive efforts to consolidate budgets, however, will seriously hamper economic growth in the EU in the years to come. For the Eastern European economies, this means that the medium-term growth prospects will also become gloomier again, due to their close economic ties with the euro area. Export growth in most countries in the region is now falling again compared to the first half of the year. As a result, domestic demand will have to play an increasing role in sustaining the economic recovery in the CEE countries.
With the exception of Hungary, CEE bond markets once again saw positive performance in August, profiting from the strong increases in prices on the developed markets in Europe and the USA. By contrast, the currencies initially appreciated, but then lost ground again in the second half of the month, as risk sentiment deteriorated. Yield premiums on Eastern European Eurobonds widened over the month.
Country focus
Russia
Massive crop losses and widespread production stoppages due to drought and forest fires – food prices on the rise
The Russian economy continues to stabilise. Unemployment has fallen substantially since the beginning of the year, and both retail sales and disposable income are reflecting robust increases compared to last year. According to government estimates, the economy is expected to grow at a real rate of 5.4% yoy in Q2, after 2.9% in the first quarter. Russia was hit by a heat wave in August and the resulting forest fires destroyed a substantial portion of this year's harvest. As a result, all wheat exports were forbidden for the rest of the year. The rate of inflation is rising, driven by increasing food prices. At its last meeting, the central bank left interest rates unchanged, as expected. The rouble depreciated against the euro-US dollar currency basket in August, in line with declining oil prices. Correlation between the Russian currency and the price of oil remains strong. Russian LCY bonds posted gains. Yield premiums on Russian Eurobonds fell initially, but then rose towards the end of the month, due to the significant deterioration in risk sentiment.
The Russian equity market once again lagged behind the performance in regional terms. The market was clearly dragged down by the heat wave, fires and the gloomy macro conditions at the global level. Chemicals and telecommunications held up relatively well, whereas the performance of oil producers and retailers was sub-average.
Hungary
After negotiations between Hungary and the IMF were broken off in July, the forint exhibited more strong volatility in August. In month-on-month terms, the forint lost the most compared to the other currencies in the CEE region. Economic growth is now back in positive territory, supported by improved foreign demand, which has been reflected by rising industrial production and a positive trade balance since the beginning of the year again. Despite the recently good export performance, however, the economic outlook is not especially bright, due to the continuing weakness of the domestic economy.
The rate of inflation recently fell to 4% in Hungary. At its latest mid-August meeting, the central bank left the base rate unchanged at 5.25%, as expected. Yields on Hungarian government bonds bucked the regional trend and rose relatively strongly in August, with intense volatility. Over the long term, the level of Hungarian yields still looks attractive. Nevertheless, prices will remain volatile, particularly in light of the lack of clarity about the new government's reform plans.
Hungarian stocks lost more than 1% in August and thus held up somewhat better than most of the other equity markets in the region. The decline was actually exclusively due to the large-scale price losses for OTP Bank, whose shares fell by almost 12%. By contrast, the oil group MOL posted a handsome gain of around 4.6%.
