Emerging Markets continue to decline on world recovery doubts

June saw a sharp rise in risk aversion as investors became increasingly preoccupied about the strength and sustainability of the economic recovery, and share prices in emerging markets were not immune from these nerves.

Nevertheless, towards the end of the month, a positive reaction from G20 leaders about plans to cut deficits within developed economies provided a boost in demand for shares in emerging markets.

Lower commodity prices placed share prices in Brazil under pressure, while speculation that Spain’s credit rating was under review compounded investors’ nerves. Brazil’s central bank does expect the country’s economy to expand by 7.3% this year, boosted by domestic demand, but it also warned that the debt crisis in Europe is likely to continue to exert further pressure.
The International Monetary Fund warned that Russia might have to allow its currency to appreciate in order to put a brake on inflation and that the government should start to withdraw its fiscal stimulus. Russian interest rates remained unchanged at 7.75% during June as inflationary pressures ease and the pace of the economic recovery picks up. Meanwhile in India, finance minister Pranab Mukherjee said the country’s economy could expand by more than 8.5% this year and by 9% next year

Share prices in China fell towards the end of the month amid concerns that expectations for economic growth in the country might be tempered by worries over the debt crisis in the eurozone and tighter policy. The People’s Bank of China believes that the country’s economy is likely to “maintain steady and rapid growth” during 2010, but warned that the backdrop, both internal and overseas, remains complicated.

The Chinese authorities also announced their intention to make the exchange rate more flexible, although China’s central bank does not intend to instigate an immediate revaluation of the yuan. China is now widely expected to dilute or abandon the two-year peg of the yuan to the US dollar, and might look instead to peg the yuan to a basket of currencies that provide a more accurate reflection of China’s principal export markets. However, the possibility of a stronger yuan triggered some concerns of slower economic growth and a drop in export activity.

In its annual report, the Bank for International Settlements warned that emerging economies might have to increase interest rates and allow their currencies to appreciate in order to avoid the inflationary pressures and the formation of asset bubbles