Brexit boosts emerging markets

Emerging Markets

Emerging equity markets generally performed better than developed markets during June. Although the UK’s decision to quit the European Union (EU) exerted heavy downward pressure on share prices around the world, many developing markets enjoyed relatively strong performance. Sentiment towards emerging markets was boosted by supportive statements from leading central banks in the wake of the UK’s Brexit vote, and by signs that interest rates in the US – and elsewhere – are likely to remain lower for longer. Moreover, nervous investors’ flight to “safe-haven” currencies and government bonds drove down yields, boosting the relative attractions of emerging-market yield.

In response to the UK’s Brexit decision, the Governor of the Reserve Bank of India (RBI), Dr Raghuran Rajan, commented: “The Indian economy has good fundamentals, low short-term external debt, and sizeable foreign exchange reserves. These should stand the country in good stead in the days to come”. The RBI maintained its key interest rate at 6.5% during June. The CNX Nifty Index rose by 1.6% over June and has climbed by 4.3% over the year to date.

In China, sentiment was dampened by disappointing trade data: exports fell at an annualised rate of 4.1% in US dollar terms during May, while imports fell by 0.4%. Meanwhile, growth in China’s consumer price inflation slowed during May to a lower-than-expected annualised rate of 2% during May. On a brighter note, the deceleration in producer-price growth proved slightly better than anticipated: producer prices declined by 2.8% year on year in May, compared with -3.4% in April.

Investors were disappointed by the news that index provider MSCI had decided not to include Chinese Class “A” shares in its emerging markets index. Although hopes of inclusion had been high during May, MSCI’s decision was driven by a lack of transparency and openness amongst Chinese firms. The Shanghai Composite Index edged up by 0.4% over the month, but has lost 17.2% since the start of 2016.

In Brazil, the Bovespa Index rose by 6.3% over June and has surged by 18.9% over the first half of the year. Brazil’s economy continued to contract during the first three months of 2016, shrinking at a quarterly rate of 0.3% and an annualised rate of 5.4%. Although the decline was less severe than many had feared, the outlook for the country’s economy remains lacklustre, undermined by political instability.