Emerging Markets suffer a large sell-off

The sell-off in January was not kind to emerging markets. Asia Pacific excluding Japan was the worst-performing sector, dropping 5.68%, but the Global Emerging Market grouping also suffered, falling 3.84%.

Emerging markets, particularly China, sold off savagely as risk aversion took hold of global investors.

In stark contrast to many developed economies, worries centred around too much growth rather than too little. In China, fourth-quarter annualised GDP figures showed a rise of 10.7%, giving a rise for the full year of 8.7%. International investors had initially seen the Chinese government’s prediction of a rise of 8% as optimistic but the country looks set to overtake Japan as the world’s second largest economy within months.

But this growth had its downside. Inflationary pressures are starting to emerge with consumer prices rising 1.9% year-on-year in December, compared to 0.6% for the previous month. The government is making moves to curb excessive lending by banks and may start tightening interest rates sooner rather than later. Retail sales rose 17.5% in December.

The story is similar in India, where the government is also trying to reduce bank lending to cool growth. Rates are likely to rise after industrial output grew by an unexpected 11.7% in November. Inflation data, due out this month, is expected to show consumer prices rising at around 7%.

The Chinese stockmarket was the hardest hit, with the Shanghai SE 180 index falling 11.07%. The Hang Seng also reflected the disaffection with Chinese stocks, falling 7.95%. The Indian S&P CNX 500 index fell 4.3% while the Brazilian iBovespa index dropped 4.6%.

The Russian RTS index was the one exception. It rose 2% over the month – one of the very few global indices to post a gain. This was little to do with Russia’s economic situation, which continues to be weak. There has been rising business activity, but at an unexciting pace, particularly for an emerging market. Traditionally, the market has simply crept up with the oil price, but the oil price dipped by around $9 (£5.80) a barrel in January. The answer may simply be that Russia looked relatively cheap and attracted global investors looking for a bargain in emerging markets.

Eastern Europe as a whole was also stronger, with countries such as Turkey and Israel posting double-digit gains, according to MSCI Barra. The major markets of Hungary and the Czech Republic all saw rises over the month as investors decided that the risks for the region were dissipating.

Emerging Markets suffer a large sell-off