Since the stock market's gate opened at the beginning of 2012, emerging countries were off to a fast start. Stocks in Brazil, Colombia and India galloped to the lead, increasing more than 10 percent within the first few weeks of the year.
By the time the end of April came around, Colombia had sprinted to the lead, followed closely by Thailand and the Philippines. All increased more than 20 percent in the first four months of 2012.
However, rather than focusing on the leaders of the pack, spectators seemed to have directed their attention toward the S&P 500 Index, as it galloped to its best first-quarter gain since 1998.
The recovery in U.S. stocks is significant and helps restore confidence in equities. We're pleased to see markets improving, especially following a rough finish in 2011. Yet there lingers a persistent negativity toward emerging markets growth and commodities that prevents many investors from jockeying their portfolios into a position for growth. Rather, they remain spectators on the sidelines, with equity fund outflows continuing.
In contrast, Eastern Europe exploded on the upside and far outpaced not only the U.S. market, but also Europe. The chart below shows investment results across three different markets. Since the beginning of the year through April 30, the iShares S&P Europe 350 ETF has trailed, while the SPDR S&P 500 ETF has placed second. Among these three investments, the Eastern European Fund (EUROX) has kept the lead for most of the quarter and took first place as of April 30.
You can see above that EUROX and the European market were climbing steadily since the beginning of the year, but by April, began to fall because of the eurozone's debt grief and concerns over China.
Over the past four months, Russian stocks, which are heavily weighted in energy companies, have underperformed many emerging markets, increasing only about 6 percent. HSBC Global Research believes that the low valuations seem to be "pricing in a lot of political risk" surrounding the protests against Russia's newly elected presidential candidate. Investors need to see the opposition movements against Vladimir Putin as very different from the Middle East discontent, says HSBC. The firm says Russia's protests are "largely liberal" without "religious dimension" which suggest future reforms to reduce the political discontent are more likely.
HSBC also thinks that the government will try to improve the investment climate. Putin suggested in a recent speech that he would like to increase Russia's rating in the World Bank's Ease of Doing Business report. Currently, Russia ranks 120th; Putin would like to set a goal of 20th place.
What may be hurting investor sentiment toward Russia in the short term is the political strain that has recently surfaced between Russia and the U.S. and NATO involving missile defense installations in Europe. This is precisely the reason we believe investors need to hold actively managed investments with experts who understand the political situation to skillfully maneuver around emerging Europe.
China, the Workhorse of the Global Economy
While China did not win, place or show among major markets during the first few months of the year, its H shares gained nearly as much as the S&P 500. Yet, the negativity that I've frequently discussed continues, even though the country is the Clydesdale of our global economy.
In the first quarter, China's GDP growth was 8.1 percent, a likely trough for the year, according to a Merrill Lynch-Bank of America conference call recently. The firm listed several reasons that China will see an improved GDP over the next three quarters:
- Although spring made an early appearance in many parts of North America, this past winter in China was the coldest in 27 years. This extremely chilly weather slowed down economic activity.
- Credit growth has bottomed out and bank lending has been reaccelerating. BCA Research echoed this thought in its China Investment Strategy this week, saying there's been a "sharp turnaround in bankers' confidence in recent months, which is also being reflected in rising bank lending of late."
- Home developer price cuts and lower mortgage rates offered to first-time buyers have driven a significant recovery in home sales. In our recent webcast on China, Andy Rothman from CLSA made some excellent comments related to mortgages, agreeing with ML-BofA, saying that each month it was getting easier for new home buyers to get mortgages, and along with lower interest rates for mortgages, this was a clear sign of "the government's process of easing up on the housing sector."
- With leadership transition close to conclusion, local infrastructure construction activity is poised to increase.
- As shown below, crude steel, steel products and cement output has shown initial signs of recovery in the recent month.
While China's Government Purchasing Managers' Index (PMI) for April came in slightly below market consensus, the number remains above the three-month number for the fifth consecutive month since December 2011. We believe the government's PMI is a far better indicator of overall manufacturing activity than the HSBC data because it takes into account domestic demand.
From the PMI's inception in January 2005, the majority of the time the PMI is above the three-month average, Chinese and U.S. stocks, as well as copper and WTI crude oil, all see gains over the following three months. So far this year, each has proved true.
BCA Research says that the latest PMI substantiates that the "Chinese economy may be reaccelerating," pointing to three trends: Monetary easing is working, external demand seems strong and may be accelerating, and the government has increased fiscal expenditures on social housing and infrastructure projects, which is supportive of ML-BofA's view above.
The race in the stock market isn't over until it's over. While a top contender may ultimately win in the Run for the Roses, the assumed "long shot" might come from behind and race to first place. Rather than place all your money on the market you believe will win, place or show, we believe diversification among markets is the way to go.
