The Hindu Business Line : Oil prices may cast dark clouds on emerging markets

For the equity markets, rising interest rates are a dampeners, more so if one takes the pessimistic view that even Asian growth has started to slowdown.

Kumar Shankar Roy

Major equity indices in the US, Europe and Asia have, in the last one month, gained 7-14 per cent.

While there is a belief in emerging markets that this finally represents a recovery from the downturn brought on by the sub-prime crisis last year, macroeconomic indicators do not seem so bullish.

Most commodity prices remain high, inflation remains challenging and central banks are reacting either with interest or forex tightening etc, notes Barclays Capital. Asian markets (with the exception of India which was closed) declined on Friday as worries about energy prices coupled with fears of a slowdown in corporate earnings hurt metal companies.

China’s Shanghai Composite slumped 4 per cent, Hong Kong’s Hang Seng China Enterprises Index and Australia’s ASX 200 lost 2 per cent. Curiously, crude oil (for May delivery) rose 2 per cent to settle at $117 a barrel on the New York Mercantile Exchange late Friday.

However, not everyone seems to be disappointed with high oil prices. The energy industry has turned to an important bankroll for Iran’s economy and industry.

The Iranian President, Mr Mahmoud Ahmadinejad, has expressed the view that that the dollar price of oil in today’s markets is a deceptive figure and oil as a strategic good should have its real price.

While on one hand, we have American equity investors betting that this signals a strengthening economy, the conundrum for Asia and emerging markets lies in controlling the effect of such high prices from spilling over to other commodities. And it already has.

Inflation is already at high levels and central banks are proactively looking at ‘decoupling’ from US, monetarily speaking, to curb headline inflation.

While South African Reserve Bank and Central Reserve Bank of Peru hiked rates on April 10, the Brazilian Central Bank did so on April 16.

The Reserve Bank of India on April 17 raised banks’ cash reserve ratio by half a percentage point to 8 per cent, to be implemented in two stages.

On the other side, if one is an optimist, the recent moves can be seen as steps that will ultimately rein in inflation from spiralling out of control.

Rallies in stock markets are proving to be short-lived as investors are keenly looking at taking profits on every upmove.

It will be interesting to see how long investments made by foreign investors this week in the markets such as $ 492 million in Taiwan, $124 million in Thailand, $32 million in Vietnam stay put.

A sustained correction in commodity prices might be good news for all but that is unlikely to happen soon, as fuel demand from emerging markets continues to be high. Bad news may be priced into equities but bad developments are surely not.

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