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

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RARE Infrastructure Emerging Market Fund Market Commentary – July 2010

August 18 2010

July was a strong month for Emerging Markets underpinned by a moderation in concerns about the European debt situation, cyclical indicators in Europe surprising on the upside and supportive earnings from the US.

China outperformed the rest of Asia, up 10%. (Thailand +7.3%, India +1.6%, Indonesia +5.3%, Malaysia +3.6). Latin America was also strong, buoyed by the strong rebound in commodity prices. Brazil (+13.7%) significantly outperformed Mexico (+5.6%) during the month. Among the other markets, Argentina and Colombia posted a 15.9% and 13.2% increase respectively, while Chile increased 12% helped by the strong Chilean peso.

For us the most interesting news in July was policymakers in China converging to a new consensus which could be best summarized as “loose fiscal, tight monetary”. The exact opposite of the tight fiscal, loose monetary policy of developed economies. It is likely China will ramp up government spending on public housing and other public works, but it will stick to its structural reforms and its property tightening measures. In Brazil the BCB surprised the majority of economists by slowing down the pace of tightening to 50bps, with the BCB more concerned with deflation risks emanating from the developed world than before. Over the medium to long term though we expect the strong domestic picture to outweigh global fears.

The scale of infrastructure investment in emerging markets continues to grow. Recent data shows that China’s total fixed asset investment in urban areas tallied Rmb5trn (+26.1% YTD). Investment in railways and highway amounted to 5% of the national total. The scale of investment in these two sectors is unlikely to decline of the next 10 years. Indeed, the country is planning to lay down 42,000 kilometers of new track by 2020, adding new high-speed rail lines between major cities. It needs to invest Rmb3trn on railway construction, and Rmb3trnon rural infrastructure construction, according to the investment institute of the National Development and Planning Commission (NDRC), Further, RMB 682.2 billion is being spent on 23 new development projects in impoverished western regions.

In Brazil, the presidential campaign beginning in earnest. According to a mid-month poll, President Lula’s candidate, Ms. Dilma Rousseff, and the main opposition candidate, former São Paulo state governor José Serra, are currently tied.

Although we remain concerned about the global backdrop, EMs are in a very strong fiscal and external position with the vital signs for growth and employment remaining very healthy.