Emerging Markets Bull Run To Continue?

The sharp outperformance by emerging markets in general compared to developed markets have rankled some experts in the US. They would cite that the outperformance is unfair, that emerging markets are loaded with huge risks - yea.. thanks for the subprime fucking mess dudes ... low risk indeed.

According to the MSCI Emerging Market Index, emerging markets stocks have gained 80% to July 27 since it reached bottom in November 2008 . High global liquidity, improvements in risk appetite, falling core markets volatility (VIX), rebounding commodity prices and relatively stable emerging markets fundamentals in comparison to past episodes of crisis are behind the recovery. Moreover, EM countries' policy response to the crisis has been relatively aggressive, planting the seeds for a positive domestic demand story.

However downside risks remain in place due to a bleak corporate earnings outlook, worries over the real economy, revival of global risk aversion, and higher US Treasury yields. So far this year (to July 27), EM equity markets have jumped 47% YTD, while global equities have increased 12%.

Outlook:

• July 27: "Research by Société Générale's cross asset team argues it is time to sell because the price-to-book value of emerging-market stocks is now higher than those in the developed world. The only other time this valuation measure was at a premium to that of the developed world was from mid-2006 to mid-2007. Emerging-market equities fell by two-thirds in the 12 months to the start of November 2008.
• July 13: July 13: According to Citigroup equity strategist Geoffrey Dennis and Jason Press “The correction in regional equity markets has reached the expected 10-15 percent range.” “Although the mood has turned sour on worries over the timing of economic recovery, there is little more downside from here and expect regional markets to break out to the upside again later this summer.”
  
• The MSCI Emerging Markets Index may climb to 985 by June 2010 from its closing price of 743.72 on June 18th, Jonathan Garner, Morgan Stanley’s chief Asian and emerging-market strategist, wrote in a research note. Profits will rebound 28 percent next year after a 15 percent slide in 2009, Garner wrote. That compares with his earlier forecast for a 20 percent gain in 2010 and a 25 percent drop this year.
  
• June 15: Deutsche Bank AG said that Latin American stocks may drop 15 percent this summer (2009) because of increased share sales in Brazil, weaker China bank lending and the unlikelihood of a rebound in the U.S. economy in the second quarter.
  
• June 2: The surge in emerging-market equities may last another six months (until the end of 2009) as faster economic growth in developing countries prompts investors to keep shifting out of lower-yielding assets. Emerging-market stocks may keep on gaining as investors shift some of the $3.8 trillion in money market funds into equities.
• May 26: If the US economy surprises on the upside, Chinese economy surprises on the downside, or the financial sector lead global sectors, developed markets will outperform emerging markets equities.
  
• May 18: Emerging-market stocks may gain an average of 20 percent this year as they rebound faster and stronger than their peers in developed countries, according to Black Rock Inc. The global economy has probably seen its worst in the past two quarters, with developing nations already starting to emerge from the recession.
• April 21: The bulls say that this is just the beginning of a sustainable recovery in global risk appetite, supported by signs that Chinese demand is growing again and hopes that the U.S. economy is not free falling anymore. The bears say that, although the medium-term outlook for emerging markets is appealing, the prospect of a slow and painful global economic recovery will translate into bouts of selling pressure.
• April 21: There are still significant downside risks and it will be important to differentiate between emerging markets. Asia remains best positioned and CEE and CIS are the most vulnerable.
  
• April 16: "Emerging-market stocks will surge a further 39 percent this year as government spending and interest-rate cuts from China to the U.S. revive demand for developing nations’ exports", according to JPMorgan Chase & Co.
  

Regional Performance:

Asia (ex-Japan): Asia (ex-Japan): Asian equities have outperformed mature markets in 2009 thanks to FII inflows, hopes of economic revival in H2 2009, and fiscal stimulus and liquidity measures that are finding their way into equities. These factors might be making some Asian markets expensive. Markets have gained 48% YTD as of July 27 (82% since October 2008) with China (50%), India (65%) and Indonesia (62%) as the best performers, and Vietnam (22%) and Malaysia (35%) as the worst. Sri-Lanka posted an exceptional 141% gain due to the end of the 26-year civil war, a $2.5-billion loan agreement with the International Monetary Fund and the government's positive stance on reforms and liberalization. Asian markets have recovered 56% of the losses incurred in 2008 (peak to trough, down 59%).

Latin America: Latin American equities has outperformed the other emerging markets regional indexes by rising 55% YTD to July 27 (92% since it hit bottom in November 2008), with strong performances in Brazil (up 68% YTD) and Chile (up 55% YTD). The laggards are Argentina (up 22% YTD) and Mexico (up 27% YTD). Overall, LatAm equities market have recovered 44% of the 2008 crash (peak to trough, down 68%).

Eastern Europe, Middle East and Africa (EMEA): EMEA equities market have gone up 36% YTD to July 27 and 69% since it reached bottom in March 2009. Russia (51% YTD), Turkey (44% YTD) and Israel (30% YTD) lead the mark, while Morocco (-0.3% YTD) and South Africa (10% YTD) have underperformed. EMEA stock markets have recovered 35% of the sharp correction induced by the global crisis (peak to trough, down 66%)

Recent EM market Dynamics:

• July 28: "I wouldn't want to encourage people to invest in China and India who have never invested before," cautioned Jim O'Neill, Goldman Sachs chief economist. "Wait for a correction."
• July 28: "Investors around the world have been pouring money into emerging-market stocks faster this year than at any other comparable time on record, despite strategists' fears of a bubble. They plowed a record $35.5 billion into emerging-market stock funds in the first half, according to funds-flow research firm EPFR Global, whose data go back to 1995. By contrast, investors withdrew $61 billion from developed-market stock funds over the same period, EPFR said."
  
• July 8:“Risk aversion levels have risen across the board,” said Nigel Rendell, a senior emerging-market strategist at RBC Capital Markets in London. “While sentiment is still uncertain, emerging markets generally will be weaker.”
  
• June 24: Overall, regional markets are now in full correction mode. This correction is now the longest and sharpest since the impressive regional rally that began on March 2 and took MSCI Latin America 73% higher in almost exactly three months. This correction is unlikely to turn into a rout due to (1) improving global and regional growth prospects; (2) a likely trough in regional earnings over the next few months; and (3) the low cost of capital, including short rates.
• June 18: Emerging-market stocks fell for a fifth day, the longest losing streak since January, amid concern credit losses at banks will mount. The MSCI Emerging Markets Index dropped 0.8 percent to 743.41 at 2:10 p.m. in New York, taking the benchmark measure’s five-day slump to 6 percent and trimming the gauge’s 2009 gain to 31 percent.
• June 10: According to JPMorgan Chase & Co., Latin American equities are poised to climb at least 22 percent by the end of 2009 because shares are cheap relative to history, global investors may increase stock holdings from a near 20-year low and commodities may rally. The investment bank said that the MSCI Latin America Local Index will advance to 73,882 in 2009. The index closed at 60,256.08 on June 9th.
• June 8: Emerging-market stocks dropped the most in two weeks as Credit Suisse Group AG advised selling Taiwan shares and speculation the Federal Reserve may raise interest rates curbed demand for higher-yielding assets. The MSCI Emerging Markets Index fell 1.9 percent to 772.25, the steepest drop since May 21.
• June 3: Reuters found that Central and Eastern Europe lagged behind the general trend in the current stock market rallies. Despite rebounding by 30-40% over the past three months to June, CEE bourses still generated rather small turnover and rallies were patchy.
  
• June 3: Sub-Saharan African markets have been among the worst performing markets in 2009 struck by domestic conditions of high government borrowing and commercial banks’ exposure to margin lending. South Africa the best performing market in the region has risen by a mere quarter. Sub Saharan Africa is experiencing a slump in private and aid inflows since the onset of the global slowdown which is a prime factor behind the underperformance of its equities.
• June 3: In late October, EM equities hit a bottom and started to rise. Since then, the FTSE emerging markets index has outperformed the developed markets index by 48.8 per cent.

p/s photos: Rachel Kum