Mirae Asset Global Investments Releases Mid-Year Outlook for Emerging Markets
July 26, 2011
Emerging Market Expert Sees Money Flows Resuming in Second Half
In a report issued today, senior investment professionals from emerging markets leader Mirae Asset Global Investments announced that they expect a more stable macroeconomic outlook for the emerging markets in the second half of this year. Supported by diminishing inflationary pressures, the effects of monetary tightening, attractive valuations and healthy earnings growth in the regions, the flow of investment assets to emerging markets has the potential to resume in the second half, according to the report.
Assembled from contributions by Mirae Asset's senior investment professionals in Hong Kong, Mumbai, São Paulo and New York, the "2011 Mid-Year Outlook on Emerging Markets" report provides an overview of Mirae Asset's latest insights on the opportunities and risks in emerging markets equity investing for the remainder of the year. For market-specific summaries, including China (p.6), India (p. 8), ASEAN (p. 10), Korea (p.12), Latin America (p.14), Russia/EMEA, South Africa and Turkey (p.16), please click here to view the full report.
Emerging Markets Outlook
The confluence of events that led to a stagnating global economic scenario will be relatively positive for the emerging market economies in the second half of 2011 and the emerging markets will likely continue to be the drivers of global economic growth. The slowdown in the developed world, including the Euro zone and the US, and declining commodity prices are viewed as helping to tame inflationary pressures in the emerging markets, creating an environment to wind down tightening for the remainder of this year. This outlook contrasts markedly with what was seen in the first half of 2011 when global emerging markets were down 0.5% while global markets were up 3.4%. Within emerging markets overall, Mirae Asset Global Investments sees the following investment themes:
- Inflation Slowing in Emerging Markets – Since October 2010, the emerging markets have been undergoing interest rate tightening to help fight inflationary pressures, driven primarily by food and commodity inflation and, to a certain extent, the relatively easy liquidity stemming from the United States' second round of quantitative easing (QE2). As the markets priced in this potential overheating scenario, the emerging markets underperformed global markets by 5.9% from the period October 1, 2010 to June 30, 2011. Since June, the inflationary outlook in emerging markets has mitigated somewhat due to a number of factors, such as the easing of food and commodity prices and signs of slowdown in the Euro zone and the US. Decreased inflationary pressure can help these economies continue to grow.
- Food/Commodity Prices – Food and commodity prices, namely oil and precious metals, saw a large price spike followed by a slowdown beginning in late April 2011. The dramatic rise in oil prices was notably driven not by supply-demand fundamentals, but rather by the geopolitical strife in the Middle East region due to supply concerns in countries such as Egypt, Syria, and Bahrain. At the same time, food prices started to ease in April, a trend which has a potent impact on the consumer price index (CPI) for many emerging market economies, since emerging market CPI baskets allocate a larger proportion to food, relative to developed market CPI baskets. Food prices may continue to stabilize in the second half of the year, particularly if weather conditions are less volatile than last year. The pullback in commodities is an incremental positive for the emerging markets as this may, on the margin, support the case for the end of tightening in these regions during the second half.
- Diminished Export Demand – The developed world made headlines in the first half of 2011 – from the devastating natural disasters in Japan, to the debt crises in the Euro zone, to continued weakness in the US housing and employment markets as well as the looming decision on the country's debt ceiling. Since developed markets are major consumers of the goods exported from the emerging markets, difficulties in the developed world are felt acutely in the emerging markets as well. For example, efforts to avoid a Greek default and possible contagion to other European countries will likely continue through the second half of 2011 without final resolution, which may add volatility to the emerging equity markets. In the US, the Federal Reserve concluded the second round of quantitative easing, which had had a positive effect on emerging market stocks. Fed Chairman Ben Bernanke has indicated US interest rates will remain at current near-zero levels for an extended period, further pressuring the US dollar. The weaker dollar has supported strong commodity prices, but any reversal in this trend should contribute to the easing of commodity inflation.
Risks Going into the Second Half of 2011 Mirae Asset Global Investments Observes:
Mirae Asset Global Investments views emerging markets and commodity prices as historically correlated to a certain extent (especially given that many emerging market countries are oil and soft commodity producers). If commodities continue their downward momentum, investors may see some emerging markets weaken somewhat as well. Second, if the economic situation in the US deteriorates dramatically, investors may begin to see money flows to the emerging markets decline.
Finally, Mirae Asset Global Investments believes the direction of the US dollar may have an impact on emerging market stock performance. While the dollar has kept close to the historic low observed in April 2008, it has recently rebounded 3% from its April 29 low this year. In the case of continued dollar stabilization or strengthening, Mirae Asset Global Investments observes a potential negative impact on emerging markets currencies, and perhaps a carryover effect on emerging markets stocks, as investors move assets back toward US dollar-based investments.
Despite these risks, Mirae Asset Global Investments continues to believe that many investors may benefit from building or adding to emerging market positions, as these investments could be a core source of long-term growth in their portfolios, particularly given solid economic fundamentals, attractive valuations, an easing inflationary environment, and continued softness in the developed world.
About Mirae Asset Global Investments
Mirae Asset Global Investments is one of the world's largest investment managers in emerging market equities (Investments & Pensions Europe, January 2014). With over 550 employees, including 123 dedicated investment professionals, Mirae Asset offers a breadth of emerging markets expertise. Mirae Asset's offices are located in Australia, Brazil, Canada, China, Colombia, Hong Kong, India, Korea, Taiwan, the U.K., the United States and Vietnam. The firm manages over $56 billion in assets globally through a diversified platform to offer market-leading franchises in traditional equity and fixed income products, ETFs and alternative strategies, such as real estate, private equity and hedge funds. Mirae Asset Global Investments (USA) LLC is focused on providing equity and fixed income investment advisory services to mutual funds, foreign investment trusts and institutions. (www.miraeasset.com)
Makovsky + Company