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Emerging markets weather crises and rise to lucrative buys
August 4, 2017, 10:30 pm

Emerging markets from Dubai to Mexico have seen better prospects for growth in these economies [Xinhua]


The US dollar has dipped against major currencies, including those of developing countries, in recent weeks leading many analysts to predict a return of investments to emerging markets.

Fears of the the US Federal Reserve’s monetary tightening and its effects on these markets have eased in the past year as countries such as Russia, India, Mexico and Brazil institute financial reforms which have helped them boost exports and lower imports.

Equally important is the inflation factor. Countries such as Brazil, which had been hard hit by recession since the Federal Reserve tapered off its quantitative easing policy, managed to lower inflation considerably in the past 18 months.

Emerging market currencies have also fared rather strongly against the dollar in Q1 and Q2 of 2017.

Despite a slip on Thursday after the US economy beat expectations and added 209,000 non-farm payroll jobs, emerging market economies where still doing far better than this time last year.

The MSCI Emerging Markets Index, which measures equity market performance in some 26 emerging countries and accounts for 10 per cent of the world market capitalization, is up 23.4 per cent year-to-date.

One of the biggest factors making emerging markets lucrative again is that economic policy in these countries has not only become adaptive to US market shifts – namely, Fed policy – but is also proactive by drawing up scenarios which include the prospects of US interest rate hikes.

This has largely helped stabilize commodity markets – also seen in strengthening currency stability, ultimately leading to stronger confidence in the economy.

These countries have also learned how to weather political crises that once debilitated confidence in the economy and pulled markets into recession.

Point in case: Brazil. Brazil has since 2013 fallen into recession and stagnation, in large part due to financial mismanagement and a plethora of corruption and fraud cases which daily make the front pages.

On Wednesday, President Michel Temer survived a congressional vote concerning bribery charges which could have been moved to the Supreme Court ultimately resulting in his ouster. The number of public officials facing graft and bribery charges is staggering.

But the economy is finally resurfacing.

The economy in 2016 contracted by about three per cent.

But for this year, the economy will probably grow less than 1 per cent some analysts expect.

The IMF earlier revised up its 2018 GDP growth from 1.5 to 1.7 per cent.

And there are indicators pointing in that direction. Take retail sales, for example; these grew 2.4 per cent in June according to national stats – almost double the forecasts.

Mexico has also been a lucrative, if not undervalued, market. It’s benchmark S&P/BMV IPC (Mexobol) stock exchange has gained 12.46 per cent year to date.

Its peso has gained more than 5 per cent against the dollar.

Perhaps the best way to describe the resurgence of emerging markets is to look at growth forecasts, particularly in Latin America.

On Thursday, the United Nations said it forecast a 1.1 per cent economic growth for the region after persistent contraction which lasted more than two years.

In its annual Economic Survey of Latin America and the Caribbean 2017 the UN attributed its forecast to “moderate recovery of the global economy, a slight rebound in the volume of international trade, and increased price levels for basic products”.

Meanwhile, a report from the Organization for Economic Cooperation and Development (OECD) showed that two BRICS countries – China and India – lead the world in terms of economic growth.

In 2017, India’s GDP growth is expected to hit 7.3 per cent and 7.7 per cent the following year, slightly better lift than figures released by the Statistics Office last week, but largely in tandem with a World Bank report on robust growth in the country.

China’s GDP growth is expected to be 6.6 per cent in 2017, within the government’s growth bracket, but fall to 6.4 per cent in 2018.

By Firas Al-Atraqchi for the BRICS Post with inputs from Agencies

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