Monthly Review of Emerging Markets, with focus on the Asia-Pacific region
- After weak performance in March, emerging equity markets delivered marginally negative returns in April. This follows strong performance in the first two months of 2012.
- A key feature of the month was the weakness of the Brazilian real, which fell by around 4% relative to the US dollar.
- By contrast, the Hungarian forint performed strongly as news emerged that the government is moving towards negotiations with the European Union and the International Monetary Fund over financial assistance.
- Economic conditions in the emerging world remain generally positive with the HSBC Emerging Markets Index showing increasing activity in the manufacturing and service sectors.
- Indonesia’s central bank expects rising domestic demand to lead to economic growth of 6.3-6.7% in 2012, highlighting to good effect strong long-term growth prospects of the wider ASEAN region.
- Meanwhile, a number of announcements from major international companies reflected the ongoing growth in consumption across Asia-Pacific.
Global emerging markets in April
After strong performance in January and February, emerging markets have generally delivered negative returns in March and April. Latin American markets have been the principal laggards in this regard. The Brazilian real also fell by around 4% against the US dollar during the month as Brazil’s Monetary Policy Committee (Copom) voted to reduce interest rates by 0.75% to 9% - the second 0.75% cut in as many months. In an accompanying statement, Copom stated that the ‘fragility of the global economy’ has been disinflationary’ for Latin America’s largest economy.
Despite this, many other emerging markets central banks have been keeping monetary policy and interest rates unchanged in recent times. In general, policymakers in the emerging world remain concerned about the prospects for the global economy, but are alert to reasonably robust domestic demand.
Recent negative newsflow from developed markets have overshadowed positive developments in emerging markets. Indeed, the HSBC Emerging Markets Index of growth in manufacturing and services rose to 53.4 in the first quarter of 2012 from 52.4 in the three months to December 2011 (a reading of over 50 represents increasing activity). As a result, service sector activity has picked up, while manufacturing output increased for the first time in nine months. HSBC’s Chief Economist Stephen King said that the latest data ‘underlines the relative immunity of the emerging nations to the economic permafrost of the developed world.’
A noteworthy development in April was the rally in the Hungarian forint. The currency strengthened against the US dollar over the month, largely due to news that an agreement had been reached between Hungarian Prime Minister Viktor Orbán and the European Commission. The agreement paves the way for discussions in relation to a European Union/ International Monetary Fund financial aid package for Hungary. Mr Orbán had agreed to moderate laws that would otherwise have given the government significantly greater influence over the Magyar Nemzeti Bank (MNB), the central bank – an issue of concern to the Commission and the European Central Bank.
The Monetary Council of the MNB noted in the minutes of its latest scheduled meeting that ‘…such an agreement would reduce the risks associated with financing the government debt and slow the pace of withdrawals of foreign funding from the domestic banking sector, being one of the most important obstacles to economic recovery.’
Elsewhere in Central and Eastern Europe, Kamil Janacek, a board member of the Czech National Bank (CNB) said in an interview that the bank should consider increasing interest rates for the first time in four years. The Czech economy has benefited from reasonably strong demand for exports over the last 12 months and there are signs that inflationary pressures are rising.
The minutes of the latest meeting of the Monetary Policy Council of the National Bank of Poland (NBP), which were released towards the end of April, showed that members of the Council are relatively upbeat over the country’s economic prospects. The NBP assessed that the slowdown in Poland could be less pronounced than previously expected, particularly as private consumption remains robust and continues to support growth. Some members also see inflows of European Union (EU) funds, which will boost investment, as an additional positive factor.
Region in focus: Asia-Pacific
Asia-Pacific has outperformed other emerging regions in recent months, helped by a combination of low valuations and pro-growth rate cuts in China.
One important indicator, which was released towards the end of the month, was HSBC’s Flash Purchasing Managers’ Index (PMI) for China: this had advanced from 48.3 in March to 49.1 in April (a reading of less than 50 represents a decline in activity). The output PMI increased from 47.3 to 49.1.
Hongbin Qu, HSBC’s Chief Economist for China, noted that ‘this suggests that the earlier measures have started to work and hence should ease concerns of a sharp growth slowdown. That said, the pace of both output and demand growth remains at a low level in an historical context and the job market is under pressure.’ HSBC expects the authorities to further cut rates in the coming months.
The first quarter of 2012 also saw the Chinese government cut is official growth target for 2012 from 8.0% to 7.5%.The real significance of the downwards revision in the target is, we believe, that the government will accept a slightly lower pace of growth as the price of achieving a more sustainable balance between exports – traditionally the driver of the Chinese economy – and domestic demand. Given the weakness of export markets in the developed world – particularly in Europe – this change in emphasis appears to us to be a sensible one.
In India, the latest data indicates that economic activity remains relatively robust. The country’s Index of Industrial Production (IIP) for February was 174.9, 4.1% higher than in February 2011. The cumulative growth for April-February 2011-12 was 3.5% compared with the previous corresponding period. Data released at the end of April suggested that growth in eight core sectors which collectively account for 38% of the IIP – coal, crude oil, natural gas, refinery products, fertiliser, steel, cement and electricity – grew at an annual rate of 2% in March.
Data and official comments from other countries in the region pointed to steady growth and/or moderating inflationary pressures. At its meeting in mid-April, the Monetary Policy Committee of the Bank of Korea, for instance, noted that, even though export growth had slowed, there have been signs of ‘a moderate recovery, with consumption and construction spending increasing. On the employment front, the increase in the number of persons employed is being sustained, led by the private sector.’ Although the Committee recognises that there are risks to growth (mainly through Korea’s trade links), it believes that the economic growth rate will return to the long-term trend.
In South East Asia, the Board of Governors of Bank Indonesia is also upbeat about the prospects for domestic demand The Board envisages that Indonesia’s economy will expand by 6.3-6.7% in 2012 and at a faster rate in 2013. The Board expects that all sectors will continue to expand rapidly, ‘led by: the transportation and communication sector; the trade, hotel and restaurant sector; and, the construction sector.’
At the company level, much of the latest newsflow has highlighted the growth and opportunities to be found in the Asia-Pacific region. For instance, towards the end of April, Apple Inc. reported that its profits in the first three months of 2012 had nearly doubled relative to the same period 12 months previous. This was driven by a 59% jump in sales. In Asia-Pacific, which accounts for around a quarter of total sales, revenue rose by 114%. Revenues from iPhones (and related services), which represent over half of the total, jumped by 85%. Sales revenues from iPads jumped by 132%. The percentage of revenue from China alone rose from 12% of the total in the first quarter of 2011 to 20% in the latest quarter.
The surging demand for smartphones is also having a positive impact on the fortunes of makers of computer chips with Taiwan Semiconductor Manufacturing Co, the world’s largest producer of made-to-order chips, reporting better-than-expected net income for the first three months of 2012.
During April, Las Vegas Sands Corporation became the first casino operator to post operating profits (EBITDA) of over US$1bn in the first three months of 2012. Net income rose by 72% to US$499m. The company benefited from the very strong performance of its resorts in Singapore, where casino revenues rose by 51% to US$701m. The company is also expanding in Macau, the only part of Greater China where casinos are legally permitted.
The prospects for many industries and companies across the emerging markets of the Asia-Pacific region have been enhanced by the growth of intra-regional trade and favourable trends within the various economies. Some companies that are based in the region clearly have leadership positions in their respective industries at a global level. The rise of the Asian consumer, for instance, is one of the largest changes taking place in the world today. Our portfolios include companies that can benefit from the growth of an increasingly affluent middle class in many of the countries. Investment in infrastructure is another theme that provides opportunities. So too is the development of financial services, including the evolution of life insurance.
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