Emerging stock markets continue to perform

PETALING JAYA: Emerging stock markets should continue to perform as their economies have suffered a more “normal cyclical” slowdown as opposed to a “structural” recession in the developed world.

In their September note to clients, Schroders head of emerging markets, equities Allan Conway and emerging markets fund manager/strategist Nicholas Field said the US recession had clearly been structural, with major systemic failure in the banking system.

“The emerging world has had no such problem.

“Markets should carry on going up from here but future gains may be limited,” both Conway and Field said in the note.

The analysts noted the general observation in most cases where the best returns were seen in the few months before a recession ended and where returns were more muted after the recession was over. Based on current markets’ performances, the recession should be declared over some time in the third quarter – a view that was widely becoming consensus among economists, Conway and Field said.

It is worth nothing that from the low of March this year, emerging markets have gone up by an average of about 75% while developed markets have rallied an average of 55%.

Meanwhile, what should continue to help keep emerging markets on the uptrend is the US monetary policy, they said.

While emerging markets were now less coupled to the US economic growth than they had been in the past, thanks to increased domestic demand and intra-regional trade, Asian currencies were still connected to the US dollar, principally through the managed Chinese exchange rate.

Hence, aggressively loose monetary policy (massive injection of liquidity) currently found in the United Sttaes still had the “power” to push capital to the emerging world.

“US rates are not expected to start rising until the second half of 2010 and so should be supportive of further emerging equity market returns,” the analysts noted, adding that this should enable emerging stock markets to continue to perform both in absolute terms and relative to developed markets.

The analysts warned of possible deflation – a continuous fall in asset and consumer prices – next year which could temper recovery trades. However, RAM chief economist Dr Yeah Kim Leng believes that is not a concern.

“Most emerging markets are still coming off their inflation highs caused by the commodity boom last year,” he said, adding that signs of a sustained economic recovery globally would help keep demand and prices “strong”.

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