RARE Infrastructure Emerging Market Fund Market Commentary – January 2010
Markets started the year strong but collapsed towards the end of January to end the month down. And contrary to 2009, the EMs under-performed their developed peers (MSCI EM -4.4% versus MSCI World -3.7% in local terms). Within the EMs some of the big winners of 2009 were the largest under performers of January suggesting that some investors started the year by crystallising their 2009 gains (Shanghai -8.8% & Shenzhen -6.7%, Hong Kong -8.0%, Mexico -5.4%, Thailand -5.2%, India -4.9%, Brazil -4.6% & Malaysia -1.1%). The anomaly for January was Indonesia, up 3%.
Was the January weakness the start of a negative trend, adhering to the age old adage that what happens in January is indicative of how the full year will play out? Was it a much needed correction after markets ran ahead of fundamentals in December? Or were investors crystallising 2009 gains ahead of a reallocation for 2010? We don’t believe the overall recovery has been derailed. However, we do expect that volatility could be quite high over the next few months as the developed market continues to work through their balance sheet worries – a large share of the negative news flow in January was to do with sovereign balance sheets
- Mounting concerns over a ballooning US deficit
- The introduction of “PIIGS” – representing the weakening financial position of the Southern Europeans with Greece leading the way
While the EM markets fell along with their developed peers (risk appetite deteriorated) we continue to advocate that the majority of EM countries should not be tarred with the same brush as their developed peers and in fact offer much less risky fundamental exposure
- Concerns over China stem from their rapid growth recovery, driven by domestic demand, and their ability to manage the tightening process – if managed properly, is this such a bad thing for China itself?
- EM balance sheets remain strong providing a domestic safety net if the developed markets weaken again
- Chile was added to the OECD
Infrastructure remains an attractive way to play the EMs
- Infrastructure development and public spending in the EMs continues on track with a number of countries announcing or re-affirming significant programmes (India, Indonesia, Mexico, Brazil)
- Domestic EM infrastructure operators have the balance sheets and desire to support government mandated infrastructure programmes
- EM stocks remain cheap relative to their developed peers despite the stronger EM domestic outlook
