The global equities rally continued in October with emerging markets rising by 2.8 per cent, according to MSCI, while the market cap weighted MSCI Bric index rose by 2.4 per cent.
Markets were aided by the expectation of a further round of quantitative easing by the Federal Reserve, which arrived to the tune of $600bn – a move that was widely anticipated in light of continued sluggish US growth. Over the month, macro drivers also moved favourably, with oil prices rising 1.8 per cent, commodities up 4.8 per cent and the dollar down 2 per cent.
The equities’ performance dispersion among regions was low in October, with EMEA the best performer, ahead by 3.2 per cent, and Asia ex Japan the worst, up by 2.7 per cent.
In the Bric markets, Chinese equities rose by 3.9 per cent in October and outperformed in Asia. Robust third-quarter GDP data in China softened the impact of a surprise interest rate hike on concerns over rising property prices. However, India delivered the lowest rise, at 1.5 per cent, as output slowed following recent interest rate rises.
After enduring a period of underperformance, Russian equities emerged over the month as the best performing of the four Bric markets, returning a robust 4.9 per cent. The turnround was supported by the price of oil, which broke through the $80 per barrel mark, and also by the financial sector, following the news that the Russian government would privatise its remaining holding of Sberbank.
Bric equity markets and indeed global emerging market equities overall have rallied strongly off the sovereign debt crisis low in May this year, benefiting from a rise in global risk appetite and liquidity. Foreign capital flows into the asset class reached record high levels as growth in developed markets became a scarce resource and investors chased after yield.
The Bric economies have shown a degree of economic independence relative to the developed world
Given the level of global liquidity and lack of growth in the developed world, it looks unlikely that either asset price inflation or currency appreciation will subside in the foreseeable future. While QE in the West remains instrumental to fuelling the rally in Bric markets equities, too much easing could increase the risk of policy missteps to equity markets.
The Bric economies have shown a degree of economic independence relative to the developed world, helped in the main by an unprecedented fiscal stimulus in China and attempts to rebalance the world’s second largest economy in favour of domestic consumption.
But China cannot stand on its own forever and the risk is now that growth surprises to the downside in the US and the fiscally constrained EU.
Despite the near-term risks of policy missteps and global growth disappointment, I believe the underlying investment case for the asset class remains intact: earnings and asset valuations for the asset class are at five-year averages, meaning investors are not yet awarding Bric equities with a growth premium.
In addition, the earnings’ growth outlook for 2011, the third year of recovery from the global financial crisis, remains solid with growth, potentially, for the asset class reaching the mid high teens.
Alex Tarver is global emerging markets product specialist at HSBC Global Asset Management