The Emea emerging markets remain resilient
The global market rally that started in early June has continued through July and into August.
This has been a welcome relief for emerging markets, which have participated but continued to lag their developed counterparts, predominantly due to the sharp recovery in European
markets. As a consequence, emerging markets have now registered a respectable rise for the year to date, albeit some distance from the peaks seen in the first quarter of the year.
There have been a number of headwinds that have continued to weigh on emerging markets. The first of these has been the sudden spike up in the price of a number of agricultural commodities, notably corn and wheat. At any time this is a very sensitive issue given the weight of food prices in the consumer basket in many emerging markets, but it is especially so given how fresh memories are of the previous spikes in 2008 and 2010/11, both of which caused so much hardship. The latter in particular was arguably one of the catalysts for the Arab Spring of 2011.
Fortunately, it does not appear that the current situation is going to have as much of an impact as those two previous occasions. The extreme heat in the US is well known and reflected in prices, which have stabilised. The spike is less extreme than in 2011 and overall food prices are still below where they were at this time last year, so the overall inflationary impact should not be too negative. Finally, the rice price, the food staple for so much of the developing world, has not been impacted.
The interim results season is also proving to be a considerable headwind for markets. In June, expectations for company earnings in emerging markets for 2012 were for growth of just more than 10 per cent. With some two thirds of companies having reported their results, this has fallen to less than 5 per cent. Earnings have been weakest in Latin America and Asia with Brazil, Mexico, Korea and China serving up considerable disappointments.
The resilience of emerging markets in Europe, the Middle East and Africa stems in part from solid results in South Africa and from the fact that most of the larger Russian companies have yet to report. As a result of this, emerging markets in Europe, the Middle East and Africa have comfortably outperformed both Latin America and Asia during the rally.
Sectorally the weakest numbers have come, unsurprisingly, from the material, energy, technology and industrial sectors. Performance among sectors has been a little less binary. The material and technology sectors have been the worst performers, but energy has performed well as the oil price has been strong.