The Hindu Business Line : Macro concerns for emerging markets

It’s hard being an investor in emerging market stocks these days. Core food prices are up, oil showing no signs of slowing down and foreign investors are hesitant to resume buying their favourite stocks in these markets.

Plus, United States remains the source of bad financial news, although doomsayers are predicting a change in direction towards the east of North Atlantic Sea (Europe). The Dow Jones Industrial Average may have posted weekly gains but chances are quite high that the rosy period isn’t going to last long. With data relating to US first-quarter gross domestic production expected this week and traders are bracing up to face a less-yielding

The 14-18 per cent weekly gains in mainland Chinese bourses may not be a precursor to similar trends in other markets. Shanghai shares rallied in the closing stages of the week after Chinese securities watch dog announced a 66 per cent reduction in the tax on stock transactions.

Interestingly, last time when they had upped the rates, foreign investors dumped Chinese stocks leading to a major correction in not just China, but also neighbouring markets such as India. Attempts such as this or the one taken on Sunday by China (concerning block deals) at shoring up stock market sentiment may not pay any long-term dividends, as sentiments seem to dance to US tunes in any case. Data from fund tracker EPFR confirms this. Money market funds posted net redemptions of $1.1 billion in the latest week while global bond funds, a safe haven, had outflows of $402 million. An inflection point if you look at China?

Perhaps. In terms of inflows, after German equity funds which had inflows of $3.9 billion, Chinese funds followed taking in a net $937 million. This added to figures such as an Asia ex-Japan funds net inflow of $1.5 billion, do give a sense of hope about tides tuning. Korea funds were one of the region’s bigger losers in the week up to Wednesday, even though Korean stock markets gained 3 per cent for the whole week. Some investors may have sensed weakness and took out $180 million from Korea funds. This poses another more difficult question. What will befall the fates of countries such as India, Pakistan and to a smaller extent, say, Philippines which have trade deficits?

Are there ways to curb the price rise of metals or curb the growing significance of oil in their import bills? The answers to all these queries may be not required if Asian markets rally next week, aided by a further Fed cut.

The GDP release may hold the key to that. But, the Fed cut can only add to the arbitrage in interest rates that already exist between the US and emerging markets. So as far as emerging economies and their stock markets are concerned, macro concerns remain and are unlikely to go away.

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