Research & Insight

With the well publicised problems in Europe, more concerns of a “double dip” and further evidence of a slow-down in Europe, it is no surprise that emerging markets fell in the second quarter. Since commodities also fell and the dollar rose perhaps the surprise was actually that the markets didn’t fall more – the 8.4% decline being slightly more modest than the fall of developed markets. As one would expect, the commodity and high risk markets led the way down – Russia and Brazil both fell an above average 15%, but it was Eastern European markets that bore the brunt of the worries – Hungary fell 32%, Poland 22% and the Czech Republic 14%.

US officials have for sometime complained that the Chinese exchange rate is artificially held at low levels and have, at recent times, gone as far as to name China as a currency manipulator. To be fair to the Americans, this is true - the renminbi on most valuation methods is far too cheap versus the dollar - which ultimately costs quite a lot of Americans their manufacturing jobs. So the recent announcement by the People’s Bank of China (PBoC) that they are going to reform and allow more flexibility of the exchange rate may be taken as welcome news to some… or at least seen as a step in the right direction.

Developed or emerging… it is official again… and again… it is emergence as usual for the Hermit Kingdom! …according to the oracle that is MSCI Barra!

Recently, Colombia's presidential election has been dominating headlines about the country, as the largely ignored economy quietly surges ahead in the background. It is now very likely that former defence minister, Juan Manuel Santos, will win as voters opt for a continuation of President Uribe's economic and social reforms. The wide margin of the first round result, while not an outright majority victory, belied pre-election polls which showed surprisingly strong support for the Green Party's candidate, Antanas Mockus. This is positive news for investors given the Uribist majority in congress, which should be able to continue to push through economic reform and the lower risk of a change in market friendly government policy.

The MSCI Global Emerging Markets index fell 8.75% in May in response to the global de-risking process that has followed renewed sovereign debt and global growth concerns. No market or sector has been able to escape these trends, as would be expected in a sharp sell-off it was defensive sectors such as healthcare and staples that outperformed the more cyclical sectors such as commodities.