Emerging markets review – July 2016

Emerging Markets

Global equity markets generally rose during July, and the overall performance of emerging markets outstripped that of developed countries as investors sought growth opportunities.

Investor sentiment in China received a boost from encouraging retail sales data: retail sales rose at an annualised rate of 10.6% in July, compared with 10% in July. Industrial production proved stronger than expected during June, rising by 6.2% year on year. The Shanghai Composite Index rose by 1.7% over July, but has fallen by 15.8% since the start of the year.

China’s economy achieved better-than-expected growth during the second quarter, expanding at an annualised rate of 6.7%. Ratings agency Standard & Poor’s (S&P) increased its forecasts for China’s growth from 6.35% to 6.6% this year, and from 6.05% to 6.3% next year. Nevertheless, S&P emphasised that these upgrades do not signal an improvement in China’s economic health; instead, they suggest that S&P had “overestimated the authorities’ appetite for slower GDP growth as the price for improving medium-term financial sustainability”. S&P believes the economy’s current trajectory is “unsustainable” and warned that the risk of a short-term correction in China would continue to increase if China’s leaders do not correct the “credit-heavy pattern of GDP growth”.

Policymakers at Brazil’s central bank maintained its key Selic interest rate at 14.25% . The Selic rate has remained static for the past eight meetings of the Central Bank Monetary Policy Committee (Copom) and was last raised twelve months ago . The Copom’s July meeting was the first led by new Governor Ilan Goldfain. Interest rates are expected to fall over the next few months as inflationary pressures start to moderate. Brazil’s rate of inflation declined to 8.84% during June and is expected to fall below its upper target limit of 6.5% during 2017. The benchmark Bovespa Index rose by 11.2% during July, and has surged by 32.2% since the beginning of 2016.

In India, the prospect of a cut in interest rates continued to recede as the country’s rate of inflation continued to creep higher. Annualised consumer price inflation edged up from 5.76% in May to 5.77% in June, fuelled by rising food costs. At present, the Reserve Bank of India (RBI) has a target inflation rate of 5% by March 2017. The CNX Nifty Index climbed by 4.2% during the month and by 8.7% over the year to date.