(MENAFN- Arab Times) KFH-Research issued a report that shed light on the sharp decline in emerging markets, caused by concerns that the United States might decrease the volume of Quantitative Easing Program, and concerns of an increase in returns of bonds, in addition to continuous drop in prices of items, not to mention weak markets that had previously witnessed robust growth, especially India and China. The report mentioned that during the week ending 12 June 2013, there were net redemptions of $6.4bln in EM. Redemptions are four times 12 month average. Total net redemption in the last three weeks came in at $15bn. Year-to-date, the flows were $14bln (27.1 percent of total EM flows in 2012).
In addition, the MSCI Emerging Markets index has declined by 9.6 percent on the year or 8.7 percent since Fed Chairman Bernanke cited on 22 May 2013 that US policy makers could scale back economic stimulus efforts if the employment outlook showed 'sustainable improvement'.
There are a host of reasons behind the sharp downturn in emerging markets, among others:
1) Fears over the US cutting back its Quantitative Easing (QE) programme. Much of the money printed since 2009 has leaked into areas offering growth, particularly emerging markets. If the speculation about so-called QE tapering is right, that supply of printed money could soon dry up.
In addition to lower global GDP projections from 2.4 percent to 2.2 percent for 2013, the World Bank recently warned that emerging markets risk an interest rate shock once the US Federal Reserve and other Western authorities start to withdraw global liquidity. In detail, the Bank said that there is the risk that the transition to higher rates occurs in an abrupt and disruptive fashion. In such a scenario, markets react pre-emptively, potentially trapping some participants in vulnerable positions that appeared manageable under low interest rates. The bank warned that banks "may be at particular risk" in countries that have let rip with the biggest asset bubbles.
2) Concerns over rising bond yields. Talk of QE tapering has lifted US bond yields and has put upward pressure on emerging market bond yields as a consequence. The benchmark 10-year note yield increased to 2.18 percent as at 17 June 2013, 55 basis points higher as compared to the lowest record this year, which is on 1 May 2013. It has reached 2.29 percent on 11 June 2013 - the highest since April 2012.
3) Continued weakness in commodity prices. That weakness of course impacts commodity-producing nations such as Brazil, Mexico, South Africa and Indonesia. For instance, sugar prices have declined close to 30 percent since July 2012, which has an obvious effect on the world's largest sugar producer, Brazil. The rout in gold prices has impacted South Africa, though that region has a host of other economic issues it's also dealing with. Gold held losses before the US Federal Reserve starts its policy meeting as investors assessed when the central bank will pare monetary stimulus.
Meanwhile, WTI crude oil price for July delivery also slipped 8 cents to $97.77 per barrel on 17 June 2013. Brent for August settlement fell 46 cents, or 0.4 percent, to end the session at $105.47 a barrel on the London-based ICE Futures Europe. Brent was $7.44 a barrel more expensive than WTI for August delivery, the narrowest differential based on settlement prices since Jan. 20, 2011.
On balance, we forecast oil prices to average at $93.2pb and $105.9pb for WTI and Brent, respectively, in 2013. Near term risks include:
* Sluggish Global Oil Demand and Rising US Oil Output - Lower than expected oil demand, particularly from Non-OECD countries in Asia coupled with rising US gasoline stockpiles could push prices lower.
* Early Unwinding of Quantitative Easing (QE) in the US - Early tightening of monetary policy could stall the US economy's recovery and ultimately reduce oil demand from the largest oil consumer in the world.
* OPEC Left Production Target Unchanged - OPEC has left its production target at 30.0mln bpd at its recent meeting in Vienna, as it is satisfied with the balance of supply and demand. Still, with the prospect of higher supplies from US, they could decide to cut production at its next meeting on 4 December 2013.
4) Weakness in previously strong growth markets, notably China and India. For China, real GDP has slowed from the 11 percent of the past decade to below 8.0 percent as a credit bubble unravels. For the first quarter of 2013, China unexpectedly registered a slower than expected GDP growth of 7.7 percent y-o-y from the 7.9 percent expansion logged in the fourth quarter of last year. But policymakers have so far refrained from introducing drastic measures to stimulate the economy for fear of inflating housing bubbles and disrupting financial stability. Instead, the government has pinned its hopes on proceeding with structural reforms, including widening market access and reducing government intervention, to lift growth.
Similarly, India's economic growth is at the slowest in a decade as investment slows while inflation remains a risk, thereby limiting scope for further rate easing. Moving forward, we expect the June 2013 quarter to clock in a growth of 5.3 percent y-o-y (March quarter: 4.8 percent y-o-y) and for FY2013-2014, we expect India to grow only 5.1 percent y-o-y-to be blamed is the slow pace of infrastructure development due to bureaucratic hurdles and policies unfriendly to businesses, as well as ballooning fiscal and current account deficits hurting growth prospects. Additionally, the bleak external environment does not seem ease India's pains as well. Further capital outflows may have negative effects on growth through a number of ways, such as lower asset prices and higher lending spreads.
Legal Disclaimer:
MENAFN provides the information “as is” without warranty of any kind. We do not accept any responsibility or liability for the accuracy, content, images, videos, licenses, completeness, legality, or reliability of the information contained in this article. If you have any complaints or copyright issues related to this article, kindly contact the provider above.