Market analysis: Comeback staged by equities across Asia

Despite weakness at the start of the year, emerging-market equities managed to close the first quarter of the year substantially higher, thanks to a rally in the latter half of the quarter.

Market participants were reassured by the dovish tone struck by several major central banks around the world, especially the US Federal Reserve, which led to weakness in the US dollar and corresponding strength in most emerging-market currencies. Meanwhile, the European Central Bank (ECB) announced greater-than-expected easing measures, cutting rates as well as extending its monthly asset-purchase programme from €60 billion to €80bn per month.

Concerns over China’s GDP growth and renminbi devaluation also eased somewhat, while political developments in Brazil suggesting a potential change in policy raised investor confidence further.

Commodity prices rallied in the latter part of the period, buoyed by hopes that measures to restrain production by major energy and metals producers would ease oversupply issues.

Emerging-market equities significantly outperformed their developed-market counterparts in the first quarter, with the MSCI Emerging Markets Index up 5.8 per cent compared with a 0.2 per cent loss for the MSCI World Index, both in US dollar terms.

Among the various emerging-market regions, indexes tracking Latin America, Europe, the Middle East and Africa recorded double-digit gains, but emerging markets in Asia generally lagged, advancing only slightly.

Brazil was one of the best-performing individual markets globally, driving gains in Latin America. The likelihood of the president Dilma Rousseff’s impeachment raised investors’ hopes for a change in leadership well before Brazil’s general elections in 2018.

Peru and Colombia were also among top-performing global markets, the former driven by currency strength and anticipation ahead of presidential elections this month, while the latter was supported by select economic indicators that showed positive momentum.

Most markets in Europe recorded double-digit returns, led by Turkey, where fourth-quarter economic data, including growth figures, surpassed market expectations.

Russian equities also performed strongly, as the rouble saw its strongest quarter in four years and several economic indicators suggested an improving environment.

African markets were propelled higher by South Africa, boosted by the rise in metals prices and record-high appreciation in the rand. However, select African markets such as Nigeria and Egypt retreated over the quarter.

In Asia, South East Asian markets such as Thailand, Malaysia and Indonesia were consistently strong during the quarter, supported by continued foreign inflows. In addition, Thailand benefited from currency strength, positive stock-specific news and signs of improving consumer confidence and strengthening domestic activity, largely supported by government spending and tax incentives, while Malaysia and Indonesia were aided by easing monetary policy and stimulus measures.

In contrast, China and India were the region’s weakest performers. Although Chinese equities gained substantially in March thanks to easing concerns regarding growth, capital flows and currency devaluation, they ended the quarter lower because of significant weakness earlier in the period. Similarly, notable strength for the Indian market in March was insufficient to offset declines in January and February.

In our opinion, the long-term investment case for emerging markets remains positive for a number of reasons.

Economic growth rates in general continue to be faster than those of developed markets, emerging markets have much greater foreign reserves than developed markets and the debt-to-GDP ratios of emerging-market countries generally remain lower than those of developed markets. Even with major economies like Russia and Brazil in recession, emerging markets overall are expected to grow 4.3 per cent in 2016, more than twice the rate of the 2.1 per cent growth projected for developed markets. Although investors have been concerned with China’s growth rate slowing down, China remains one of the fastest-growing economies in the world.

Mark Mobius is the executive chairman of Templeton Emerging Markets Group.

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