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With emerging market stocks rallying by almost another percentage point on Monday, EM equities are now passed their January highs and are back to their highest levels for three years and within sight of all-time records.
With the MSCI EM index up 9 per cent since mid-March, the speed of the surge has surprised many investors, given the general caution induced by everything from the Middle East turmoil and the eurozone and the Japanese earthquake. But investors are bouyed by a stronger-than-expected recovery in the US (not least Fridays’ strong payroll numbers). With so much bad news around, it’s the sliver of good news that has caught the imagination.
But not so much good news on the US front that the Fed is going to rush to tighten monetary policy further after ending quantitative easing and after the European Central Bank lifts rates, as it is expected to do later this week. Charles Robertson, chief strategist at Renaissance Capital, told beyondbrics: “My assumption is that the markets are rallying on the basis of continuing relaxed monetary policies.”
In late afternoon trading in London on Monday, the MSCI EM equity index was up 0.72 per cent at 1,193.67, compared with a recent low of 1,091 in mid-March and a closing high of 1,161 in January. The last time EM stocks were high was June 2008, before the Lehman crisis.
The index is 3.53 per cent up on the year, with China 5.67 per cent higher, India 3.9 per cent down and Brazil 0.2 per cent lower. The biggest gains have been in eastern Europe, led by Russia which has soared 16.3 per cent, thanks to the booming oil price. Romania is second on 12.3 per cent and Hungary third on 10.6 per cent – both markets where vulnerable economies are performing a bit better than had been feared.
Can it last? The sense that EMs were oversold in the face of the turmoil in the Middle East has clearly largely now been acted upon. What’s left is some confidence that the US will successfully steer its way out of economic trouble for at least the next few months – which benefits EMs, mainly through their exports.
But other clouds remain on the horizon. With Brent crude on Monday leaping through $120 a barrel on Monday, the concerns about oil supplies remain. The conclusion of the impasse in Libya is not in sight. Meanwhile, EM inflation fears, which spooked investors, well before the Middle East triggered the oil price spike, haven’t gone away. China may be managing over-heating in its economy well, in the view of many analysts, but India, Turkey and Brazil all cause concern.
Nick Chamie of RBC is one analyst who switched from “bullish” to “bearish” in December and has says he has now moved to “neutral”. But he sees risks in the outlook, with the prospect that EMs won’t move together but see increasing differences between the good and the not-so-good performers. In his book, Mexico, South Korea and Poland look attractive. But he’s steering clear of South Africa and Turkey.
In other words, the current rally will soon have run its course. But, for those who caught the wave in time, it was well worth the ride.
Related reading: EM vs DM: the battle of the strategies, beyondbrics Emerging markets: back in fashion, beyondbrics CEE flows: looking up, beyondbrics Fund file: Out of Africa, beyondbrics Fund flows: Investors not so hot on EM, beyondbrics
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