Developing nations shine amid the crisis gloom

By David Oakley and Patti Waldmeir Published: July 28 2009 03:00 Last updated: July 28 2009 03:00 It has been a good year for emerging markets. That may seem an odd statement, given the severity of the global recession and the uncertainty - in spite of recent rallies - that still hangs over the financial markets as the second anniversary of the credit crisis approaches. But many emerging markets have had a good crisis, or at least a better one than their industrialised peers. Nowhere is this more true than in China. Its equity markets have boomed, with the Shanghai Composite index up more than 88 per cent since January 1 - making China the best performing large stock market this year. This compares with the S&P 500, the world's leading benchmark, which has risen a modest 8 per cent. China's economy is expected to grow by at least 7 per cent this year, new lending has risen sharply and there are signs from leading indicators, such as purchasing managers' surveys, that the momentum can be maintained. Risk appetite among investors also remains strong, in spite of very high price earnings multiples of more than 30 on the Shanghai Composite. Robert Buckland, global head of equity strategy at Citigroup, says: "China has shown that if you have a strong fiscal position, you can weather the storms. If it is still growing strongly by the end of the year, then it will be in a good position as the economies of the industrialised world should start to pick up by then." The turning point for China, and indeed the rest of the emerging markets, appears to have been the launch of the country's vast Rmb4,000bn ($586bn) fiscal stimulus package in November. This paved the way for a recovery in emerging market stocks across the globe, a good four months before the industrialised markets saw a turnround. India has also had a relatively good credit crisis. Like China, its equity market is one of the best performing this year - the Sensex is up 55 per cent - and its economy has had a relatively shallow downturn. Most forecasters expect the Indian economy to grow by about 5 per cent this year. Elsewhere, however, the picture is more mixed. The stock markets of the small, exporting Asian nations have continued to attract investors, helped by surging Chinese equities. South Korea's Kospi index, Singapore's FTSE Straits Times index and Malaysia's FTSE Bursa KLCI index are all up more than 30 per cent this year. But the news is not so positive for their open economies, which have been hit hard by falling exports. South Korean exports, for example, continue to plunge more than 20 per cent year-on-year. The outlook is also not as clear cut in Latin America. Brazil's economy is expected to see a mild contraction of just 1 per cent this year. It has been helped by China's continuing appetite for its commodities, particularly iron ore, its prudent fiscal policies and its relatively closed economy. In contrast, Mexico has suffered because of its links to the US, which buys 80 per cent of its exports. Meanwhile, Argentina and Venezuela remain no-go areas for most investors because of perceived economic mismanagement. The Middle East and Gulf states have also suffered. But the stabilising oil price has boosted stocks. Saudi Arabia's Tadawul All Share index has rebounded close to 40 per cent since its lows in March. However, the clear laggards in the emerging market world have been in central and eastern Europe. Russia, the regional behemoth, remains in deep trouble. Many analysts expect the economy to contract by 10 per cent this year. However, its stock markets have recovered from their recent sell-off. The RTS index has risen more than 20 per cent since July 10 and is up 60 per cent since the start of the year. Nigel Rendell, senior emerging markets strategist at RBC Capital Markets, says: "Overall, the emerging markets have done relatively well in this crisis, particularly when compared with the developed markets." Mr Buckland adds: "In a sense, the financial crisis has been the making of the emerging markets in that they are no longer some kind of super-cyclical play. "It is no longer the case that if you downgrade US GDP by 1 per cent, then emerging market GDP will be downgraded by 2 or 3 per cent. The balance sheet management of the emerging markets has been better in this crisis than the developed world." However, there are still risks, even in China, the catalyst for the stock market revival. Fraser Howie, stock market analyst and author of Privatising China: Inside China's Stock Markets , says the Chinese economy is still relatively immature compared with the industrialised west. "The banking system has been on steroids at the behest of the government," he says. "What's driving this market is a liquidity bubble of unseen proportions from the banking sector. China has a lot of work to do economically." Xu Xiaonian, Professor of Economics and Finance at China Europe International Business School (CEIBS) also warns that the continually rising market poses high risks. "Not much money went into the real economy in the first half, but to the stock markets instead, which will increase risks if inflation occurs." Mr Rendell says: "China has been a big support for the emerging world, but it is not a haven. It is a good economy to back when compared with other markets, but China is not out of the woods yet - and neither is the rest of the emerging world." Additional reporting by Shirley Chen