Research & Insight
Another big month as July witnessed the continued out-performance of Asia-ex-Japan (MSCI Asia ex Japan rose 13.02% in USD) as global markets reacted enthusiastically to better economic news backed by strong liquidity. The markets began the month with profit taking after the strong second quarter but soon started to move ahead again. The rise was primarily driven by earnings beating expectations, again on a global basis, and improving economic data in both Asia and the US. Oil was down 6% for the month while Copper spiked on the back of demand from China. The best performing Asian markets were led by Indonesia (+24.18% in USD), Korea (+18.60%) and the Philippines (+16.28%). The laggard markets were Thailand (+3.93%), India (+8.92%) and Malaysia (+10.31%). China itself rose 10.83% and Taiwan 11.82%.
Markets continued to move ahead, fuelled by the steady stream of buying of emerging companies by investors from developed economies. The rise of 11.1% brings the return for the year to date to over 50%. $36bn has flowed into emerging markets this year – split roughly equally between investment in long-only funds and ETFs. By comparison almost $50bn has left developed markets (source EPFR Global). The only area not to see significant inflows was Eastern Europe but, perversely, Poland (+28.6%), Turkey (+20.8%) and Czech Republic (+19.4%) were three of the top four markets, along with Indonesia (+24.5%). Every single market except Morocco (-6.2%) exhibited positive returns, though those returns were fairly modest in Thailand (+3.9%), South Africa (+5.1%) and Russia (+7.8%).
A recent trip to Mexico leaves this visitor with the disappointing feeling that the country is standing still, whilst its Latin neighbours pass it by. With the notable exceptions of Argentina and Venezuela, the rest of the region has made strides forward in macroeconomic stability, reform and capital market accessibility. Progress has been reflected in upward trending sovereign ratings from the major agencies – Brazil and Peru attained investment grade in 2008; Colombia is on track to regain investment grade in 2010. Yet Mexico is threatened with ratings downgrades.
“De-coupling is dead” was a familiar refrain from brokers and clients (and us) as emerging markets collapsed last autumn.
The second quarter of 2009 saw a significant shift in investor sentiment; from the extreme risk aversion that followed the collapse of Lehman Bros in 3Q 2008, to the strong rally across global equity markets after the initial stages of stabilisation (green shots) began to emerge towards the end of March 2009. Stock and sector preferences shifted with risk aversion. During the second quarter of 2009, investors that had moved into defensive stocks in 2008 up until the end of March 2009 aggressively switched into cyclical stocks with earnings leveraged to a recovery in the economy. Commodity prices also moved in line with global growth expectations, declining sharply during 1Q09 to experience a strong recovery from March onwards on expectations that the restocking phase had commenced.
