Emerging Markets Report - January 2011
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17 Ianuarie 2011 |
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RAIFFEISEN BANK S.A. |
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Regional overview
Equity markets end the year with very robust performance, developed markets again considerably stronger than Emerging Markets
Following poor price performance in November, Central and Eastern European equity markets posted strong gains in December, tracking the stock market trend in the major developed markets in the USA and Europe. The other Emerging Markets (EM), on the other hand, lagged behind the established industrialised countries again in terms of price performance. The comparatively weaker performance of the EM equity markets versus the developed markets was seen throughout the entire fourth quarter. As these price gains on the equity markets occurred in parallel with relatively sharp price declines for government bonds, it is likely that significant reallocation of capital out of bonds into stocks played a role in this regard.
China continues to pursue a more restrictive monetary policy to counter inflationary risks, most recently with increases in the minimum reserve interest rates. In the months ahead, more measures can be expected in this field, including hikes in key interest rates and controls on lending. In Brazil, the new central bank governor is also likely to move forward with rate hikes in the near future. Rising commodity prices have pushed food prices to new record-setting highs at the global level, and for the EM in particular this has dangerous potential, in both social and political regards.
The US economic data were either in line with expectations or surprisingly positive towards the end of the year. The labour market and the real estate sector, however, continue to be very critical weak points in the US economy. Consequently, the US central bank has hinted at further expansion of stimulus measures if the situation on the labour market does not improve.
Upbeat US economic data towards year-end, but underlying problems remain in the US economy
Government bonds in the USA and (core) Eurozone countries suffered losses again in December. As a result, long-dated bonds have conceded much of the gains accrued since the beginning of the year. In the euro area, the heads of government were able to reach agreement on key aspects of the approach to stabilisation following the end of the EFSF safety net in 2013. But no progress at all was made in resolving the underlying problems of excess public debt in the South European peripheral countries and Ireland, or the massive economic imbalances within the euro area. In this regard, it remains to be seen what steps politicians will be able to agree upon in the future. As a result, the (European) financial markets will be focusing on this subject again in 2011 as well.
CEE economies, in particular Poland and the Czech Republic, continue to show signs of robust recovery. On the other hand, the economic situation in Turkey has turned somewhat more gloomier of late. More intensive efforts to consolidate budgets, however, will seriously hamper economic growth in the EU in the years to come. Consequently, domestic demand in these economies will have to play a stronger and stronger role in sustaining the recovery in the CEE countries.
CEE bond markets profited from investors' improved risk sentiment in December, based mainly on the recent good fundamental data coming out of the USA. As the same time, however, mixed developments were seen for the region’s currencies. The strongest appreciation was booked by the Russian rouble, which had been crippled by massive capital outflows in preceding months. The worst performance was registered for the Turkish lira, and the Czech koruna also weakened. The improvement in investors’ risk sentiment was reflected in falling yield spreads for the region’s Eurobonds.
Country focus
Russia
In Russia, the rate of inflation advanced to a new high for the year in December, prompting the central bank to raise the prospects of interest rate hikes for the year to come. Expectations of rising interest rates were thus reflected in higher bond yields as well in December. The rouble appreciated against the euro-US dollar currency basket, in line with rising oil prices. Positive developments were also seen in Russian Eurobonds, as yield spreads on these instruments dropped in December.
The Russian equity market posted performance of around 7% in December, ending the year at its highest level in the last 12 months. On the whole, however, it limped behind most of the other Emerging Markets in 2010. In light of the still relatively favourable valuations, this market still has good potential for 2011.
Hungary
Hungary: Rate hikes and rating downgrades, mounting tensions between the government and the central bank
The reform measures of the new government are the dominant topic on the capital markets in Hungary. In reaction to the measures the government has taken so far the major international rating agencies downgraded Hungary's credit rating, with an outlook for further downgrades in the future. The country now just barely still has an "investment grade" rating from all three agencies. One argument cited by the agencies is that the measures taken so far will only generate high budget revenues over the short term at best and will likely have a negative impact on the economy over the long term. To be fair, however, one must also keep in mind that Hungary was the only country in the region which entered into the crisis with budget consolidation measures already underway and that the government is strongly committed to bringing the budget deficit below the 3% mark in 2011 already, in strong contrast to its neighbours and many other EMU countries.
One aspect worthy of note in this situation is the mounting tension between the government and the central bank: the Hungarian finance minister has appealed for lower interest rates and the government has even gone so far as to propose that the central bank set a higher inflation target. The central bank, on the other hand, is quick to point out the poor budget situation and rising inflationary pressure (most recently 4.2% versus the maximum target of 3%). As a result, the central bank raised the base interest rate twice in December, from 5.25% to the current level of 5.75%. Yields on Hungarian government bonds, however, had already broadly priced in the rate hikes as early as November, and thus actually dropped in December. The forint posted gains against the euro, but lost more ground versus the Swiss franc, which is yet more bad news for foreign currency borrowers. Over the long term, the level of Hungarian yields still looks attractive. Nevertheless, prices will remain volatile, particularly in light of the persistent lack of clarity about future reform plans and the tensions between the government and the central bank.
The Hungarian stock market index rebounded somewhat from the painful losses registered in the previous month. At around 3.3%, however, the gain fell well short of the performance seen on the Polish or Czech markets, for example. The market heavyweight MOL heaved the market higher with a gain of almost 12%, managing to almost completely recoup its losses from the previous month.
Poland
Poland’s economy still in good shape, rate hikes probably on the cards for 2011
Poland's economy is looking very robust right now, with the flagging pace of growth in foreign trade being offset by positive developments in domestic demand as the main growth driver. Industrial production grew at a pace of around 10% yoy in November, powered by higher domestic and foreign demand. Inflation recently rose to 2.7% yoy, thus remaining slightly higher than the central bank's target. As expected, the central bank left the base rate unchanged at its record low level of 3.5%. During 2011, however, the bank's monetary policy will likely become more restrictive again and interest rates will be raised. Prices of Polish government bonds advanced relatively strongly in December, with Polish bonds and the zloty profiting from the at least temporary easing of the euro area's sovereign debt woes. As soon as rate hikes by the Polish central bank begin coming to focus due to inflationary pressure, the Polish currency will likely see more appreciation and strengthen versus the euro.
The Polish stock index WIG posted a gain of around 5% in December, following a modest correction in November. There was brisk demand for stocks in the materials sector in particular, with several of these names registering double-digit gains. Banks – on the other hand – underperformed the market as a whole, similar to the development seen in November.
