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Emerging Markets

Emerging Market (EM) Returns                   Q1          LTM

Shanghai Exchange (China Mainland)        23.9%     - 2.5%

MSCI Emerging Markets Index                     9.8%      - 1.9%

Hang Seng (Hong Kong)                                12.8%       0.0%

MSCI India                                                        6.3%       13.4%

Summary

  • Stimulus leads to improved Chinese data
  • India election to provide stability
  • Brazilian economy challenged
  • EM posts sharp rebound as investors turn bullish

China’s service PMI increased to 54.8 in March, while its manufacturing PMI rebounded to over 50, indicating a return to expansion. The jump in China’s Manufacturing PMI reading from 49.2 to 50.5 was the biggest increase since 2012 (50 denotes expansion). The government survey was supported by the independent Caixin manufacturing survey which also jumped from 49.9 to 50.8. The Caixin survey focusses on SMEs and is therefore more representative of the underlying economy and importantly is not influenced or manipulated by the Chinese government. Imbedded in the data was a pick-up in new manufacturing orders & new export orders, both good lead indicators and rising to highest level in 6 months. The Chinese authorities are stimulating domestic demand with a package of tax cuts, infrastructure investment and measures designed to support credit growth. Macroeconomic indicators were positive with fixed asset investment, industrial production and retail sales all showing significant signs of improvement. China's economy grew slightly faster than expected achieving +6.4% in the first quarter from a year earlier.

India’s geopolitical tensions with Pakistan remain elevated however optimism is high that the current coalition government will return to power in upcoming elections. Early opinion polls pointed to a return of Prime Minister Modi’s coalition Government in the upcoming general election helping ease concerns over potential near-term political instability. Indian domestic economic data also improved with manufacturing PMI jumping to 54.3 compared to 53.9 the previous month. Meanwhile corporate earnings growth expectations have also ticked upwards, indicating to a positive shift in economic momentum for the worlds’ second most populous country. Indian economic growth is expected to accelerate to +7.5% in 2019. 

Brazil, Latin America’s largest economy, is expected to contract in the first quarter of 2019 after March industrial production fell by more than double economist expectations. The Brazilian economy has failed to recover since emerging from a deep recession two years ago, with jobless rate surging to 12.7% in Q1. Ultra-low interest rates have not jumped started the economy as hoped and given the countries stretched public finance the government is fiscally restrained. Private-sector investment is desperately needed to accelerate growth; however, business confidence is low and messy domestic politics is a barrier to investment.

Emerging markets equities posted a strong return in Q1, led by China. All markets in the region closed higher, helped in part by progress in US-China trade negotiations. The dovish shift by major central banks also boosted sentiment. The Fed’s dovish comments and the US’s decision to suspended tariff hikes on Chinese goods, together with ongoing government support for the Chinese domestic economy, were all supportive. China A-shares were particularly strong as MSCI announced plans to quadruple their weight in the MSCI Emerging Market index to 3.3% from a current 0.7% by November of this year.

"It's not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for." --Robert Kiyosaki