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Emerging markets: a half year review

Despite their losses of the past six months, emerging markets are now being described as ‘safe havens’ in a world fraught with risk.

Emerging markets: a half year review

This is the latest in a series of articles looking at how global markets performed in the first half of the year and their impact on investment funds.

Amid the start of the turmoil in the Middle East at the beginning of the year, investors were reminded of the risks of putting their money into developing economies. Fast forward a few months and emerging markets are now being described by some as ‘safe havens’ in a world fraught with risk.

In a half-year period in which markets the world over suffered, this description is relative. The uprisings across the Middle East and northern Africa – and subsequent oil price rises – frayed investors’ nerves. As did Japan’s earthquake, tsunami and nuclear crisis, which led to worries about the fallout for its trading partners in Asia. As it turned out, these fears were more than justified, with widespread disruptions to supply chains.

US fallout

Diverse as the world’s emerging markets may be, they are all hostage to decisions made in the central bank of the world’s largest economy. As well as the direct impact of the fragile US economic recovery on those economies that rely on its consumer spending, markets slavishly followed signs of further stimulus from the US – or not as the case now seems to be.

Questions over the fate of Greece and the other peripheral European countries had not been worrying emerging market investors too much at the start of the year, but have also crept higher up their list of concerns.

Throughout the past six months though, the biggest threat to emerging markets has been inflation. What damage will rising prices exact on growth economies? How will their authorities respond? Will economic growth come crashing down as a result?

Nowhere is this question more pertinent than in China. See our review of how Asia Pacific markets fared in the first six months of the years.

Widespread losses

What is the result of this bubbling cauldron of uncertainty? Stock markets across the emerging world have lost value over the past six months. The MSCI Emerging Markets index is down some 4.6% year to date. Of the major emerging markets, India’s Nifty index (down 8.7%), Brazil’s Bovespa (down 10%), and China’s Shanghai Composite (down 2.6%) all fared badly.

Brazil’s dilemma is an extreme example of what many other emerging markets face. Inflation is rising (6.55% at last count), so the central bank has been fending off claims that it is ‘behind the curve’ and raising interest rates. That though attracts investors who cannot resist returns of 12.25%, and money flows in with subsequent destabilising effects.

Booming but vulnerable Turkey faces a similar problem, but has opted to stretch economic credibility in response. In these markets and in others, many investors would rather wait for evidence that inflation is finally back under control before committing their cash.

Russia pays off

Russia also has an inflation problem. But investors have shown they are willing to overlook such foibles as rising prices, an uncertain political future and poor governance in exchange for the benefits that rising commodity prices bring. Namely some elusive investment returns: the RTS equity exchange is up 6.4% year to date.

‘Russia remains arguably the cheapest way to gain exposure to oil and gas, while the consumer discretionary stocks in India are once again offering value as are some of the banks and the Chinese market looks cheaper than it has for a long time,’ says Philip Poole of HSBC.

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