BRICs, CEE focus of latest Raiffeisen Capital Management EM Report
Raiffeisen Capital Management has highlighted the BRIC countries, Poland, the Czech Republic and Hungary in its latest monthly Emerging Markets Report.
After gains in the previous months, February was marked by consolidation on most of the Emerging Market (EM) stock markets. Once again, the EM markets lagged behind the established industrialised countries in terms of price performance.
Following a short interruption in the final quarter of 2012, it thus appears that the trend that started back in 2010 is continuing, and indeed taking on an even broader scope. Quite uneven performance was registered again for the various EM exchanges. Generally speaking, price losses in Eastern Europe were relatively moderate. By contrast, the BRIC countries (Brazil, Russia, India and China) posted quite sharp losses of 4%-5% each. Unfazed by this, some of the smaller Southeast Asian market continued to surge higher. Share prices in the Philippines, Thailand and Indonesia appear to be on a one-way street towards higher levels these days, even though valuations in these markets are hardly cheap anymore.
Aside from the mixed results for different countries, major differences were also seen in both valuations and performance between the individual market segments and sectors. Mining shares continue to suffer from relatively weak performance, and the same is partially true for the cyclical industrials sector as well. On the other hand, demand remains robust for customer sector stocks, although valuations are also rather high for these assets.
In terms of the leading economic indicators, most of the gains for the Emerging Markets have only been modest so far. Data from China and India were disappointing recently. Another period of economic recovery will probably only start to take share in the second half of the year. Nevertheless, China will likely remain the growth driver, and the government’s growth targets of 8%-8.5% also look achievable for 2013.
In general, however, one must take into consideration that in the last several years the massive expansion of lending was one of the main drivers of growth in many Emerging Markets. Naturally, this went hand in hand with a significantly higher level of debt for private households and companies. In terms of the absolute levels, this debt is no cause for concern. But at the same time, for most countries it appears that it will be impossible to sustain the old growth rates in lending, and this will tend to act as a drag on economic growth. In the future, growth gains will have to stem more from increases in productivity, but in order for this to occur in many cases there will have to stronger investment, less bureaucracy and less corruption, and to some extent new strategies in economic policy. The current pause in the economic recovery in many of the EM countries is thus by no means a coincidence and it is certainly not only the result of the recession in the eurozone.
Significant amounts of capital continue to flow into EM bonds. Nevertheless, corrections in prices here and there may be on the horizon. Some of these setbacks have already happened, triggered by the latest mild increase in yields on US government bonds. 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.