Can Emerging Markets continue there top performace

emerging markets maintained their momentum in December, capping a spectacular year for investors. Economic data continues to suggest they will be crucial in leading the world out of recession, with Eastern Europe as the only remaining weak spot.

The Shanghai 180 A Share index rose 2% over the month, giving it an overall gain in 2009 of 88.3% – and indeed China was one of the few countries revising its GDP data higher. It pushed its 2008 GDP figure from 9% to 9.6% and said that growth figures for 2009 were also likely to be higher than originally forecast. This means China should surpass struggling Japan as the world’s second largest economy this year. Growth has been seen across the board and analysts have been particularly encouraged by the growth in the service sector.

The country’s economic success also dragged up the rest of the region, in spite of Singapore’s surprise fall in GDP growth in the fourth quarter. The Purchasing Managers’ Index (PMI) rose in China, South Korea, Taiwan and India, with China’s domestic carmakers seeing particular strength. Inflation returned in December after a year of falling prices with consumer prices up 0.6% over one year. This made some analysts nervous, particularly with house prices shooting up, though others saw it as an inevitable consequence of higher growth.

India’s benchmark index – the S&P CNX 500 – rose 3.7% in December, leaving it with a full year gain of 79.6%. Strong PMI data assuaged concerns that manufacturing might be slowing. In the meantime a report by the London School of Economics suggested India would retain its outsourcing dominance for at least another 15 years.

Eastern Europe had a strong month, in spite of ongoing worries about its economic position. The MSCI Emerging Europe index was up 6.6% in December, leaving it 65.1% up on the year. Russia also had a good month - the RTS index was up 5.3% in December, making it one of the top performing markets of the year with a gain of 130.5%. Russian GDP rose 1.9% in the fourth quarter, with Prime Minister Putin claiming the “active phase of the crisis” was over.

Brazil’s Bovespa index was up 2.3% for the month and 70.43% for the year. That said, the economy is expected to be largely flat in 2009 as third-quarter growth disappointed – the economy grew 1.3%, compared to consensus expectations of 2%. The weakness came from the agricultural sector, but the country saw strength in domestic consumption and investment.

The IMA Global Emerging Markets sector was top of the league tables for the year as the average fund delivered 58.6%. Asia Pacific was next, with the average fund returning 53.4%. Whereas other ‘risk’ trades such as smaller companies seem to have lost momentum going into the new year, emerging markets appear to maintaining their spark.