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Home | RARE Infrastructure Emerging Market Fund Market Commentary – June 2010

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RARE Infrastructure Emerging Market Fund Market Commentary – June 2010

July 19 2010

The downward momentum of May continued through June with global markets weakening further. However, investors truly seem to have seen the light with the Ems outperforming their developed peers for the 2nd consecutive month (MSCI World -3.7% versus the MSCI EM -0.5% in local terms). Performance within the EMs was mixed with Asia (ex China) (Thailand +6.2%, India +4.6%, Indonesia +4.2%, Malaysia +2.3%) significantly out-performing the rest of the EMs (Shanghai -7.5%, Shenzhen -8.5%, Brazil -3.3%, Russia -3.3%, Mexico – 2.8%). We think this can largely be explained by a continued shift by equity investors away from risk into defensive – Latam, which is highly commodity driven, underperformed and the Chinese market, which is largely domestic speculation, was weak.

News flow out of the EMs in June continued to be on balance positive – the big exception being their World Cup performance. For us probably the most important was the announcement by China that they would de-peg the Renminbi allowing for appreciation for the first time in 2 years. We see this as positive for several reasons

  • Increases global competitiveness and hopefully spurs global growth
  • reduces (but not eliminates) the risk that the US will take action against China labelling it protectionist
  • indicative of China’s confidence in its own economic recovery
  • appreciation of RMB sees chinese earnings that much more attractive for a foreign holder

From a macro-economic perspective the EMs also continue to show their superiority with the tightening process now well under way

  • Brazil tightened its reference rate for the second time by 75bps
  • Chile commenced tightening with a 50bp increase in its rate
  • China de-pegged its currency (discussed above) and reaffirmed commitment to fiscal targets, only concern is that they may tighten for too long
  • Argentina finalised its debt swap with a 66% acceptance level. We will now be watching to make sure the policy makers dont overshoot de-railing the economic recovery.

Politics and regime stability remain key for EM investors and in June we were pleased to see

  • the political standoff in Thailand resolved without further bloodshed although we remain wary over the medium term
  • Brazilian presidential campaigning kicked off with Serra gaining ground in the polls

Although the global outlook remains uncertain we continue to take comfort that the EMs are fundamentally fairing better than their developed peers.