Emerging Markets Report - October 2011
 |
17 Octombrie 2011 |
 |
RAIFFEISEN BANK S.A. |
Adresa
Piaţa Charles de Gaulle, Nr. 15
011857 Bucureşti, Sector 1
Telefon
+40-21-306.10.00
+40-21-306.15.54
Fax
+40-21-230.07.00
Website
www.raiffeisen.ro
Global overview
Almost all EM equity markets posted more steep price declines in September
Prices on the Emerging Market (EM) and the developed country stock exchanges continued to fall in September. It appears that the global economy is experiencing a broadly synchronised slowdown in activity, and many international financial institutions and analysts have lowered their global growth forecasts for 2011 and 2012. The likelihood of a recession in the USA, the EU and Japan has increased sharply. By contrast, economic growth in most of the Emerging Markets should remain in positive territory, but will also weaken tangibly. In relation to China, there are more and more observers who are worried about a "hard landing" for the world's second largest economy. So far, however, the economic data from China are not showing any signs of this. Nevertheless, if there is a steep decline in Chinese economic growth, many of the other Emerging Markets would be threatened with significantly lower economic growth as well.
Problems include the global slowdown in economic activity, fears of recession in the USA and Europe, and the Eurozone debt crisis
The commodity markets held up relatively well in the summer months, but the deterioration in the global growth prospects in September then led to some sharp price declines, in particular for industrial metals. This may lead to tangible easing in inflation in the EM in the coming months and could also allow the central banks and governments in the EM to take stronger economic stimulus measures if necessary. Consequently, we still believe that most of the Emerging Markets are well prepared for a global economic slowdown, thanks to their improved financial resources and their strongly growing domestic markets.
European banking system under increasing pressure; still no sign of credible solutions on the horizon
The persistent uncertainties in relation to the Eurozone debt crisis are having a stronger and stronger impact on economic performance in the Eurozone and the global economy. The European banking system is exhibiting increasing signs of stress, and some of the indicators in this regard are already at or higher than the levels seen around the Lehman Brothers collapse at the end of 2008. In contrast to autumn 2008, there is very little support from the state now, and indeed this is actually part of the problem in many respects. The conflicting interests within the Eurozone are obviously strongly limiting the ability of the governments to take action. As a result, there is still no credible plan to effectively put an end to the crisis. Instead, policymakers seem to be hoping that the ECB will be able to stabilise the situation for the time being and prevent any further escalation. Italian and British banks were downgraded by the rating agency Moody's, either because the relevant country rating had been previously lowered (Italy) or because the agency postulated less willingness to provide public sector aid to the banks in the event that such became necessary (Great Britain). The EU stress tests for banks carried out in the summer are turning out to be more and more of a farce. The major Belgian-French bank Dexia, which allegedly passed the stress test without any problems, is now on the verge of collapse and will be rescued by the Belgian (and French) governments. Considering that the bank's balance sheet total amounts to well more than one and a half times Belgium's economic output, a bail-out on this order of magnitude may result in some deterioration of Belgium's sovereign rating. At present, it is unclear how the governments in the Eurozone wish to stop this vicious spiral. In any case, the US finance minister felt compelled to propose that the Europeans significantly expand the EFSF stability fund and, if necessary, take on considerably more debt. This proposal, of course, comes as no surprise, as the USA – the world’s biggest debtor – has “solved” its debt problems again and again by simply racking up new debts. But since this approach ultimately leads to cranking up the money printing presses and thus entails significant long-term inflationary risks, there is currently still strong resistance to this “solution”, especially in Germany.
Will the Euro stability fund be increased massively?
On the other hand, an EFSF of several thousand billion euros refinanced by the ECB may look like the “cheapest” solution and be seen by politicians as an attractively simple “solution”, which may at least save them the headache of some very unpopular measures for a while. Accordingly, if the situation deteriorates even further it is certainly conceivable that policymakers may resort to this option. Of course, this “solution” does not actually solve anything, but then neither does constantly raising the US “debt ceiling” which actually has no real meaning left at all.
Country focus
China
As the risks threatening economic activity increase at the international level, the risks in China are also mounting, although this is not visible in the data developments right now. In terms of inflation, the high point has probably been passed. At the same time, the last consumer price inflation reading of 6.2% yoy was well higher than the central bank's target, which is set at 4.0% (but is only taken as a guideline). More progress continues to be made in internationalising the yuan. The latest plan of the Chinese government authorities is to create a CNY-denominated fund which undertakes investments abroad but also extends loans. This is yet another attempt to raise the yuan's profile as an international currency. The range of fluctuations on the Chinese equity market is enormous. Ups and downs of 4% to 6% on a daily basis are not unusual. The close correlation with the established markets is clear to see.
Chinese central bank facing increasingly difficult decisions between fighting inflation and the threat of a major economic slowdown
The Chinese equity market will only be able to embark on a positive trend again when the situation and developments on the international markets calm down and support a soft landing for the Chinese economy. The fluctuations in prices are mainly driven by banks and real estate companies. The former are suffering from pressure due to worries about higher defaults on loans, while the later are under pressure due to falling sales and fears about financing bottlenecks in the future. In general, the real estate sector is one of the areas where some market observers are expecting a significant decline in prices in China, and this in turn could act as a brake on the economy. It remains to be seen whether this will actually happen.
India
Volatility is also very intense on the Indian equity market. The acute risk aversion on the international markets has clearly led to outflows of capital from India (as well as other markets), and this has also resulted in pressure on the Indian rupee. Speculations about restrictions on capital flows, however, were immediately denied. Along with the international worries, inflation also continues to be a problem in India. No easing in the situation is expected in the immediate future. India continues to struggle with high food and fuel prices.
Inflation continues to be the main problem for the Indian economy
Moreover, wage growth is running at 12%-15%, which is the highest in the Asian region, and the latest depreciation of the rupee also means that imported inflation is on the rise. The latest rate hike to 8.25% was nevertheless probably the last one, as the risks to the economy have also increased substantially. Accordingly, by the end of the year it is quite likely that the wholesale price index will slip to below the 8% mark and the next rate cut will be priced in. This could generate some material support for the equity market.
Brazil
Growth expectations for 2011 and the following year have been lowered further, and most analysts are now expecting the real increase in Brazilian GDP to fall well short of 4% in both years. The Brazilian currency has also lost ground massively against the US dollar again and this finally prompted the central bank to intervene and sell USD to support the Brazilian currency. This stands in sharp contrast to the situation in the spring and summer of this year, when the central bank was constantly looking for new ways to foil further appreciation of the Brazilian real.
Brazil’s central bank intervenes to support the real
In the midst of this, share prices of exporters have been able to buck the general trend on the stock market and bounce back slightly, after having suffered from the strong national currency in the past months. Nevertheless, most Brazilian shares slid substantially lower in line with the international trend. Commodity sector stocks lost ground in particular, as commodity prices tanked, along with consumer sector companies and real estate stocks.
