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Emerging markets to be hot commodity in 2018?
November 5, 2017, 10:41 am

Workers make bicycle parts at a factory at Ludhina in the Indian state of Punjab. India remains one of the strongest emerging market performers, analysts agree [Xinhua]

Investments in emerging markets have been on the rebound in the past 18 months soaring to new levels despite the dollar and oil prices fluctuation, and look likely to continue their upward climb in the coming year.

From Chile to Turkey, Peru to Russia, Egypt to India, and China, emerging markets have become sharply lucrative again due to economic policy in these countries not only becoming adaptive to US market shifts – namely, Fed policy – but also becoming 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.

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 29.37 per cent year-to-date.

Just three months ago, the Index was up 23.4 per cent – the steady increase is noticeable, as is the outperformance when compared with European and US indices.

And most of these outperformers are located in Latin America and Asia.

Take Brazil, for example, which is now emerging from a three-year recession. It’s benchmark Bovespa stock exchange is up 24.20 per cent year-to-date.

In Chile, that figure is 35.52 per cent while Argentina, which is still waiting to be shifted from the riskier “frontier” market status to “emerging”, the Merval stock exchange is up 62.13 per cent.

UK-based financial services group bfinance said in a quarterly report that there is “a surge in emerging market appetite”. It said that as of June 20, 2017, 24 per cent of new equity engagements were focused in emerging markets or “emerging Asia”.

It revealed that emerging market equity performance grew 18.4 per cent over a period of a year to end of June 2017, outerperforming Europe (15.5 per cent) and US equity (9.3 per cent).

And this trend is likely to continue as Emerging Markets appear to welcome US President Donald Trump’s decision to nominate Federal Reserve Governor Jerome Powell to replace current chief Janet Yellen. The expectation is that while Powell will not halt interest rate increases, he may choose to delay such action for a while.

Powell has voiced his opinions that it may be time to slowly roll back some of the policies – without rocking the boat – which Yellen green-lighted in a bid to get the US economy back on track.

Powerhouse China, Powerhouse India

These markets, as in Asia, have moved from being commodity-focused (suffering from the commodity market crisis of the past two years) to services and technology-based markets.

Leading this transformation are China and India, two of the world’s biggest emerging markets and key growth prospects in BRICS.

According to Reuters and the MSCI Emerging Markets country indices, China’s markets are up 45.2 per cent year-to-date, while India’s markets are up 31.5 per cent in the same period.

India’s growth was briefly stunted due to the demonetization drive launched by the government last year – with GDP growth falling to just 5.7 per cent in the second quarter, a three-year low.

However, the government has been pushing for bank reforms and streamlining regulations for foreign investment. In May, it terminated a government body which was tasked with approving foreign direct investment (FDI) – and seen by some as being restrictive – and let the approval of such ventures up to individual ministries.

This is part of Prime Minister Narendra Modi’s Make in India policy, to woo foreign investors and boost the country’s productivity and competitiveness.

According to government statistics, FDI rose 8 per cent between March 2016 and 2017.

On Tuesday, a World Bank report lauded India for boosting access to credit system and making it easier to secure to procure construction permits. India moved up 30 places in the Bank’s ease of doing business ranking.

The World Bank has also forecast a revival of demand in the commodity markets, which will be a boon to India, China and others.

The Bank says that falling supply and increased demand will largely contribute to a rise in gains for energy and metal commodities in 2017.

Boosting the presence and viability of emerging markets is a necessary policy, says Chinese President Xi Jinping.

“We need to amplify voice of emerging markets and developing countries,” he added.

“We need to seek practical results in our (BRICS) economic cooperation, we have not fully tapped potential of BRICS yet,” Xi said at the BRICS Summit in Xiamen in September.

In its latest economic outlook, the International Monetary Fund (IMF) said in August that China can expect sustained strong growth of 6.7 per cent this year and a likely average of 6.4 – revised up from 6 – per cent up to 2021.

But the report said that China must quickly move to curb “household, corporate and government debt—is expected to continue to rise strongly”.

Nevertheless, the manufacturing sector has continued sustained growth since last year in China. The China’s Manufacturing Purchasing Manager’s Index (PMI) was 51.0 in October.

The government survey tracks the health of some 3,000 large and state-owned companies.

The reading is above the neutral 50-point level, signalling an expansion in the manufacturing sector, according to the National Bureau of Statistics.

A reading below 50 represents contraction.

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