Emerging Markets Monthly Update.

While Western governments, particularly the UK's, are wondering if they dare remove the economic stimulus that is supporting their economies, their emerging market counterparts are facing the policy challenge of potential asset price bubbles. The World Bank recently sounded a warning on the inflation pressures building up on the back of a rapid rise in equities and house prices in places such as China, Hong Kong and Singapore.


The trouble is that international money is looking for a safe home and at the moment, Asia offers a tempting combination of relative stability and high growth. The IMF raised its growth forecasts for Asia on the back of improving demand for exports, with its GDP forecast for the region as a whole now up to 2.8% this year and 5.8% next year, a near doubling of previous estimates. Meanwhile its forecast for China rose from 7.5% to 9%, for South Korea from 1.6% to 3.6% and for India from 5.6% to 6.4%.


This strength is not confined to Asia. Another IMF representative suggested this month that Latin America had weathered the credit crunch so well that the resulting strength in the currency and flows of foreign capital could create bubbles in future. According to the Economist Intelligence Unit, fund flows into emerging markets for the year have exceeded those into developed markets for the first time.


However, the news was not universally good as the IMF slashed some of its estimates for Eastern Europe. In the region, only Poland and Albania now look like they will post positive growth for 2009. Of the major economies, Hungary is down 6.7% this year and should continue to contract in 2010, while Latvia and Lithuania, weighed down by debt problems, is expected to contract an eye-watering 18% and 18.5% respectively this year.


Stockmarkets sold off heavily towards the end of last month, but most were in positive territory for the month overall. India was the significant exception, however - the benchmark BSE Sensex index dropped 5.4% in the last week of the month, dragging it 7.2% lower for October. It suffered as Reliance Industries and Bharti Airtel posted weaker-than-expected results.


China continued its strong run. The Shanghai 180 A Share index rose 8.8%, while the FTSE Xinhua rose 8.6%. Elsewhere in Asia, Malaysia and the Philippines also saw good gains. Brazil was largely flat, while Eastern European markets were stronger in spite of the news from the IMF. The MSCI Eastern Europe rose 2.23% overall, while the MSCI Poland and Russia indices rose 6.07% and 4.26% respectively