RARE Infrastructure Emerging Markets Commentary – October 2009
Stop, start, stop, start, stop… The story for the last 5 months in terms of performance with October again weaker after the September rebound. We expect a continuation of the trend as the recovery (and investors) find their fotting. The EMs continue to out-perform their developed peers (MSCI World -2% versus the MSCI EM -0.5% in local currency). However mixed performance from the individual markets suggests more fundamental thought and less momentum investing – Hong Kong +3.8%, Malaysia +3.4% and Brazil 0% out-performed Thailand -4.4%%, India -6.3%, Indonesia -4.4% & Mexico -2%. China was again the outlier with a very strong month (Shenzhen +11.0% & Shanghai +7.8%).
Macro-economic news flow across the EMs continued to improve in October
- Reported CPI levels were contained/slightly up – signs of recovery but no overheating (yet)
- Industrial production numbers continue to improve
- Unemployment rates have slowed & in many cases reversed
- Benchmark interest rates were held flat with signs that tightening isn’t too far away
- GDP growth revisions continue to be on balance up
One of the themes we have been supporting this year is that the EMs have a lot of fuel left in the tank to support their domestic economies should it prove necessary (interest rate cuts, domestic surpluses etc). Further, and very importantly, while the EMs have been happy to utilise their resources they have proven to be wary of overheating their economies. And in October we saw the first signs that policy makers were looking to shift the balance away from support and towards tightening – something we have been looking for over the last few months
- In China the Central Bank indicated that loose monetary policy was not indefinite warning regulators to control the pace of lending thereby keeping a check on liquidity
- The HK Monetary Authority in a move to slowdown the rising property prices capped the mortgage limit to 60% and mortgage loan values
- Policy makers in South Korea & India indicated that tightening measures were not too far away
- In Brazil a 2% tax on foreign purchases of equities and bonds was imposed by the government, in an attempt to slow further appreciation of its currency
We do not expect a big run ahead of the year end for the EMs, but nor do we expect a significant pull back. Longer term we continue to believe the EMs offer good fundamental value with exposure to real growth.
