What upbeat flash PMI numbers mean for emerging markets
Growth in the advanced economies continues to pick up. Economic activity in the Eurozone, Japan and the US continued to recover at a stronger pace in November, showed the Flash Purchasing Managers’ indices (PMIs) for the month.
The flash Eurozone Composite PMI Output Index jumped to 57.5 this month from 56 in October—rising to its highest level since April 2011. A reading above 50 indicates expansion from the previous month. With this reading, the economy is on course for its best quarter since the start of 2011.
Not only the headline number, but other indicators of output, demand, employment and inflation too climbed to multi-year highs in November, with the manufacturing sector leading the upturn.
“There are signs that political uncertainty appears to have subdued business optimism a little, but the broad-based nature of the upturn, and the rate at which rising demand is feeding through to the labour market, suggests the Eurozone will see a strong end to 2017 and enter 2018 on a firm footing,” said the IHS Markit press release.
Similarly, manufacturing conditions in Japan improved at the sharpest rate since March 2014. Flash Japan Manufacturing PMI rose to 53.8 in November from 52.8 in October. Apart from the headline number, new export orders too expanded at the fastest pace in almost four years.
Though the IHS Markit Flash US Composite PMI Output Index eased from 55.2 in October to 54.6 in November, the rate of expansion continues to be strong and survey respondents indicated a robust and accelerated rise in new order volumes. The recovery in developed markets (DMs) should improve the prospects for export growth in emerging markets (EMs), including India.
According to market experts, recovering business activities and rising optimism about future growth in DMs would lead to some funds flowing back to these economies.
On a year-to-date basis, MSCI Emerging Markets Index has rallied 33%, outperforming the MSCI World Developed Markets Index, which has risen 18%.
“Since this coincides with calendar year end, one might see these impacting new fund allocations to EM equity markets in 2018. As for India, economic growth has so far disappointed on the back of short-term hiccups from demonetization and GST, we have to do catch-up on earnings front. Since valuations have remained high for India on hopes of a significant earning recovery, any delay there coupled with political disappointment in state elections could result in diversion of funds from India to other more promising/cheap EMs,” said Deepak Jasani, head of retail research at HDFC Securities Ltd.