Emerging markets fall on European debt crisis

Emerging markets suffered in May as risk aversion became the order of the day for investors.

The eurozone crisis proved more important than a raft of positive economic data coming out of the BRIC economies, though the markets were also hit by increasingly onerous government measures to tackle excessive growth. Overall, the MSCI Emerging Markets index was down 6.7% in May, putting it in line with the FTSE 100 (down 6.6%) and just ahead of the S&P 500 (down 8.4%). Eastern Europe was the worst-performing region, with the MSCI Emerging Europe index down 8.4% over the month after a particularly weak showing from the Hungarian markets. The MSCI Latin America, Asia, and Far East indices all fell in line – down 6.73%, 6.81% and 7.18% respectively over the month.

The Chinese market had its weakest month since September 2009 after the Chinese cabinet approved a plan to reform the country’s property tax regime. Property companies are well-represented in the Chinese index and had already been hurt by government measures to bring in higher down-payments and mortgage rates.

Nevertheless, the wider Chinese economy is still growing at speed, with the latest GDP figures showing a rise of 11.9%. The country is also spreading its largesse – Taiwan saw its fastest growth in 30 years, primarily on the back of surging computer chip and display panels to China. It enjoyed GDP growth of 13.3% in the three months to 31 March 2010 and a 62% rise in exports to China in April.

India also saw strong GDP growth – up 8.6% for the three months to 31 March 2010. This was in line with estimates, but raised fears of interest rate rises as the country’s benchmark inflation is around three times that of China. However, the eurozone represents around one-fifth of exports, so this may dampen inflationary pressures. The S&P CNX index was one of the month’s best-performing, down just 2.8%.

Russia finally emerged from the doldrums. Its economy expanded for the first time since 2008 in the first quarter, rising 2.9%. This was lower than expectations, but nonetheless an important turnaround. It is being helped by the sustained strength in the oil price and the government’s $100bn (£68bn) stimulus. However, the Russian RTS index had a dismal month, falling 11.9%.

Brazil is showing signs of above-expectation growth with lending on the increase and construction costs rising and indeed the OECD raised its growth forecasts for the country during the month. The country raised rates in May and is likely to raise them again in June when first quarter GDP data is revealed.