Global View

Emerging markets overview

After entering the year in a bear market environment, emerging markets ended the 2nd quarter essentially flat, with the MSCI Emerging Markets index returning -0.8% in US $ terms. Most markets corrected in June, erasing gains recorded earlier during the quarter. Latin American and Eastern European markets ended the three-month period with positive returns, while Asia experienced declines. Latin American markets recorded double digit returns due to stronger domestic currencies, higher investor confidence and rising commodity prices. Brazil and Argentina were among the top performers in the region. In Europe, Russia and the Czech Republic outperformed while a stronger Lira limited Turkey’s losses. Strong economic growth and high commodity prices continued to support the Russian market while investor confidence in Turkey suffered due to political uncertainty despite higher than expected GDP growth. Concerns about a recession in the US and its impact on Asia, coupled with overheating and inflationary concerns, led Asian markets to end the period in negative territory.

China’s economy grew a robust 10.6% y-o-y in the first quarter of 2008 despite heavy snowstorms and slower export growth. Inflationary pressures eased in May with consumer prices increasing 7.7% y-o-y compared to 8.5% in April, mainly due to lower food prices. The Central Bank, however, maintained a tightening policy, raising the reserve requirement ratio by 100 basis points to 17.5% in June. This followed two increases of 50 basis points each, in April and May. Foreign direct investment into the country rose 55% y-o-y to US $42.8bn in the first five months of the year, as foreign investors remained confident of China’s bright future. In the area of trade, exports rose higher than expected 28.1% y-o-y while imports jumped 40.0% y-o-y due to higher domestic demand and commodity prices. This resulted in a trade surplus of US $20.2bn, the largest monthly surplus for the year. In an effort to expand regional trade relations, China signed a free trade agreement (FTA) with New Zealand, its first such agreement with a developed country. China and Australia also agreed to resume negotiations for a FTA, while China also signed 35 business and investment agreements, totaling more than US $8bn with the US , in June. Additionally, China and Taiwan concluded their first official talks since 1999 by agreeing to resume direct flights between the two nations.

GDP growth in South Africa slowed to 2.1% y-o-y in the first three months of 2008 from 5.3% y-o-y in the fourth quarter of 2007. The mining and quarrying sectors detracted from growth due to a 22.1% y-o-y fall in output. Strong infrastructure investment in the power sector as well as for preparations ahead of the 2010 soccer World Cup could support growth in the future. Inflation, however, accelerated to 10.9% y-o-y in May from 10.4% y-o-y in April, mainly due to higher food and oil prices. In an effort to curb inflationary pressures, the Central Bank raised its benchmark interest rate by 100 basis points during the quarter. Retail sales experienced its second monthly decline with a 0.3% y-o-y contraction in April as rising inflation and higher interest rates impacted domestic demand.

The long-term outlook for emerging markets remains positive as these economies continue to display relatively strong fundamental characteristics and are still expected to grow at a much faster rate than their developed counterparts. In the short-term, however, we can expect more volatility in view of a prolonged major downturn in the US economy, rising inflation globally, economic overheating in China and India, as well as highly volatile exchange rates and commodity prices. We have already seen corrections in global equity markets, including emerging markets, bringing markets down to even more attractive levels.

Going forward, we will continue to take a longterm view to investing in emerging markets and invest in companies that are well managed and have clear comparative advantages.

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