Emerging markets decline on European debt issues

Share prices and currencies in emerging markets received a boost during April from the news the US Federal Reserve intends to maintain its current near-zero interest-rate policy. Encouraging economic data from the US boosted hopes of a consumer-led recovery that would prove positive for Asian exporters.

However, the European debt crisis triggered a revival in risk aversion that could lead many investors to avoid riskier assets, including those based in emerging markets.

In common with many other indices around the world, the Brazilian Bovespa was affected by growing concerns some European countries might default on their debt. Interest rates in Brazil rose for the first time in over a year during the month, providing a boost for the Brazilian real. Meanwhile, shares in Russian companies fell sharply over the latter part of the month amid fears budget deficits in Europe and moves by China’s government to put a brake on lending activity could derail growth in developing economies.

In India, the Sensex registered its third consecutive monthly gain. The continued strength in the Indian rupee has fuelled hopes foreign investors will be more inclined to invest in Indian companies, attracted by the country’s strong economic outlook. The Reserve Bank of India raised interest rates in an attempt to curb inflation, but warned that the global recovery remains fragile, which could affect India’s exporters.

In China, the Shanghai Composite index fell by 7.7% over April and hit its lowest level since October during the month as China’s government announced plans to cool the domestic property market. The Chinese economy expanded by 11.9% year on year during the first quarter of 2010, having grown by 10.7% during the final quarter of 2009. Speculation grew during the month that China might finally be moving towards a revaluation of the yuan – many commentators believe China’s currency is substantially undervalued.

The International Monetary Fund (IMF) increased its forecast for global economic growth during 2010 to 4.2% and believes that growth will be spearheaded by China. Developing economies are tipped to expand by 6.3% during 2010 and by 6.5% during 2011, while Asia’s economy is forecast to grow by 7.1% during 2010, driven by strong international demand for raw materials and manufactured products. China’s economy is forecast to expand by 10% during 2010, while India’s economy is expected to grow by 8.8%, considerably higher than the IMF’s previous forecast of 7.7%.