Emerging market equities

January 2012 (covering December 2011)

Global emerging market equities dipped lower to end a disappointing year for the asset class, although many markets in Asia recorded gains. The best performing stock markets tended to be countries with inflation under the central bank’s target zone, for example Malaysia, Philippines and Indonesia. Chinese equities responded positively to lower inflation and the potential for looser monetary policy in 2012. Where inflationary pressures remain a concern, for example India, there was less support for equities.

Stock markets in emerging Europe were again overshadowed by events in the eurozone. Sovereign debt issues continue to dent investor confidence despite the initial success of the ECB’s longer-term refinancing operations (granting of loans to more than 500 European banks). In Russia, political concerns and lower oil prices also weighed on sentiment. The Central Bank of Russia cut its benchmark refinancing rate by 0.25% to 8% as November’s CPI headline rate dropped to 6.8% y-o-y. Aiming to increase liquidity and transparency, Russia’s MICEX and RTS exchanges completed their official merger this month.

With the exception of Colombia and Chile, country returns were broadly negative across Latin America. Stocks in Mexico struggled to break into positive territory despite encouraging signs that the domestic economy is making steady progress, both in terms of employment growth and better than expected economic data. The Brazilian labour market also appears to be in good health, as reflected by the country’s unemployment rate falling to a new record low of 5.2% in November. Interest rates in Brazil were cut by 0.50% to 11% as 2012 inflation expectations fell to 5.3%.

Both the dollar and US Treasuries benefited from ongoing macro concerns. Commodity prices generally weakened, led by silver and gold, with modest iron ore gains. Energy prices dipped mid-month but Brent crude oil recovered to end the year at US$107 per barrel, more than US$12 higher than at the start. The spread between emerging market bonds and US Treasuries widened to end 2011 at 404bps.

Emerging market equities underperformed their peers in developed markets by 13% in 2011; the poorest relative performance since 2000. The majority of this underperformance was in January and February (on account of rising inflation), September (on account of global risk aversion) and November (on account of renewed concerns in the eurozone). The successful strategy in 2011 was to be overweight in defensives versus cyclicals. The top three sectors in emerging markets were consumer staples, telecoms and consumer discretionary. The three worst performing sectors were industrials, materials and financials.

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