Global manufacturing optimism turned into gains for emerging market economies this past week. From this perspective it would seem that the global economy is weathering the eurozone crisis without too much wear and tear. Expectations are so low for the markets coming into 2012 that any good or not-so-bad news is having an immediate positive impact.
The MSCI Emerging Markets Index (MXEF) rose 2.5%, the biggest gain in a month. MXEF is a free float weighted equity index, making it a great way to measure the position of the market. Benchmark measures in South Korea, Turkey, India, and Russia, have surged at least 2% as a result of this newfound optimism. The ruble gained 1.5% as Russia’s largest export, oil, gained. Russia’s biggest lender, OAO Sberbank (SBER), rose 3.5% as well and Russia’s Micex Index (MICEX) increased by 3%. Even Eastern Europe benefitted from the gains. Hungary sold three-month Treasure bills at 7.67%, the highest rate since August 2009. South Africa’s FTSE/JSE Africa All Share (JACSH) Index rose 2.4%. Gold and copper prices in South Africa also climbed higher.
Asian stocks rose Tuesday as well on optimism that the economies of the region will withstand Europe’s current crisis. This optimism is a result of manufacturing gains in India and China. Europe’s crisis might still slow demand for Asian goods and India’s economy could be restricted by high borrowing costs and global economic weakness. At the moment, however, Asian economies are holding up despite the turmoil in overseas markets. China and India manufacturing data topped consensus and brought about broad gains across markets and commodities.
The iShares MSCI Asia Pacific Excluding Japan Index (AAXJ) gained 1.3%. This fund provides leveraged, low-risk exposure for many of the Asian countries that experienced gains last week. The Hang Seng China Enterprises Index (HSCEI) climbed 3%, the best gain in a month. South Korea’s Kospi Index (KOSPI) and India’s Sensex ((SENSEX)) both rose 2.7%.
India’s manufacturing activity rebounded on the back of increases in output and new orders. The PMI data showed increases in measures of output, employment, orders, and export orders. The country’s central bank may reverse its rate increases to boost growth as inflation is showing signs of easing. It is expected this will also reverse the position of the rupee. This activity might provide an opportunity for foreign investors to ride the upstream in India. The Market Vectors India Small Caps ETF (SCIF) is a viable option for gaining exposure. This fund is well-weighted in India, equally covering financials, materials and industrials. As such it provides leveraged risk.
The affects of western and Chinese New Year celebrations have helped to boost the manufacturing PMI in China. China’s government has also released restrictions to spur growth, cutting banks’ reserve requirements this past November. The US Market is steadily improving while China is moving in the opposite direction. This creates a problem because China is the largest trading partner for most Latin American emerging markets, including Brazil and Argentina.
Latin American equities climbed on Tuesday as well with benchmark indices in Brazil and Argentina leading the gains. Brazil’s Ibovespa gained 2.4% on Tuesday after climbing to 1.9% on Monday. Argentina’s Merval Index rose 4.2% on Tuesday. Mexico’s IPC climbed 0.3%. Peru’s LSE General climbed 1.3% and Chile’s IPSA saw little change.
Brazil’s Petroleo Brasiliero (PBR) climbed 2.3%. PBR is arguably the largest oil company in Latin America. For a large oil company the share price is relatively low so volatility can be a risk factor with this stock. Vale SA (VALE) climbed to 4.2% on Tuesday. Although VALE did end the week down 1.7% this stock still averaged a gain of 2.5%. Futures prices for crude oil and metal in Brazil also rallied. Also in Brazil, copper prices climbed 2.7% and oil prices climbed 4.2%. Argentina’s Tenaris (TS) rose 8.2%. This stock is still expected to grow further as Argentina’s shale gas and oil production continues to expand.
Brazil has recently seen the emergence of a two-speed economy. Both employment and wages have remained high, resulting in increased performance of consumer sectors, giving the country a slightly improved outlook where capital intensive industries are concerned. Brazil has also had recent interest rate cuts. This combined with a cheaper local currency has improved competition among domestic manufacturers.
Argentina’s President Fernandez has recently shown a willingness to confront and correct some market distortions caused by invasive government policies. The intrusive and limiting actions of the Argentine government have been a major concern for investors. However, the government is steadily showing signs of change and reform. There is also confidence that prices of key export commodities will hold up to the economy in the long run.
The iShares S&P Latin America 40 Index (ILF) is a great way for individual investors to gain exposure to the growth in Latin America. This region is on the rise as political regulations and tensions are easing. The region’s leaders are working together to grow their economies and improve the overall circumstances of the region.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.