Our Opinion: 2015
Fast growth does not equal strong stock market performance
2014 was a difficult year for emerging markets, falling over 4% (in US Dollar terms).
China’s domestic stocks (Shanghai Composite) were the top performer this year – up 40%, despite a significant slowdown in the China economy. It was in favour partly because international clients were able to access the market, via Hong Kong, for the first time, and partly because there is belief that another shot of liquidity is on its way.
Second was Venezuela, up 39%. A slight oddity since its economy is so threatened by sliding oil prices. The main reason is that exchange controls prevent locals exporting funds, giving them little option but to invest in equities in an attempt to beat inflation.
Pakistan was third (up 31%). It seems to be getting its act together following the IMF bailout last year. Inflation is down to 4% and growth is at its fastest in six years. Neighbouring India was up 28% as the new Prime Minister has unveiled a new round of pro-market reforms. In fifth place was Egypt, up 25% as it bounces back from three years of turmoil.
The bottom five economies were influenced by collapsing oil prices and political turmoil. Colombia fell 23%, and Nigeria 33%. Greece fell by 34% whilst the Ukraine was down by 42%. The worst performer was Russia, with a 44% fall.
Whilst emerging markets are trading on attractive valuations, China is slowing, commodities are falling and the US Dollar is rising. Better returns in the US often tempt capital away from emerging markets, which are traditionally thought of as risky assets.
Gillian Tett, in the Financial Times, made the point that many emerging-market firms have borrowed in US Dollars but service the debt in local currency. The rise in the Dollar makes that repayment more expensive, leading HSBC to predict that emerging market growth will fall from 4.2% in 2014, even whilst the developed world gathers momentum.
The fund managers we work with continue to believe that emerging market are a core part of most portfolios. The best performers may be markets linked closely to the US – such as Mexico and South Korea, who export to the US and will benefit from the growing wealth of US consumers. India, the Philippines and Indonesia have domestic markets growing so fast that it are likely to have some immunity from external weakness.