Mumbai/Dongguan, China: If investors in New York and London are seeing the first delicate signs of a recovery, their counterparts in developing countries say they are witnessing a full-on spring.
After a crushing fall in the last year and a half, stock markets in developing countries are riding a wave of optimism that the recovery of the global economy is at hand and being led by the developing world, especially China. Though emerging markets remain far below the lofty highs they attained at least a year ago, investors are again viewing their chances of growth as better than those of the US or Europe.
Optimistic: Traders tracking the markets online in Mumbai on Wednesday, when the Sensex breached the 15,000 level intraday.Indranil Mukherjee / AFP
As a result, the Nifty has jumped by 64% in the last three months. China’s CSI 300 index of shares in Shanghai and Shenzhen has risen 37%; Brazil’s Bovespa has risen 41% over the same period. In comparison, the Standard and Poor’s (S&P) 500’s gain of 28% looks modest.
“There was a stampede for the exits in the fourth quarter,” said Gonzalo S. Pangaro, portfolio manager of the T Rowe Price Emerging Markets Stock Fund. “The market is starting to realize that although these markets face issues, they are manageable issues.”
So much so that analysts have attributed some of the recent gains in the S&P to investors’ belief that the Chinese economy is improving. It is not just China that is generating optimism. A lot of improving economic data is bolstering developing countries. While industrial production has rebounded in China, so have car sales in India and retail sales in Brazil.
Could all this be irrational exuberance? Current valuations are extremely rich: The price of stocks on the Nifty is at least 15 times earnings. Prices are nearly 21 times earnings on the Bovespa and 29 times earnings on the CSI 300.
The optimistic view is that these price-earnings multiples reflect the return of an appetite for risk in the markets, which normally accompanies a more positive outlook, and a belief that these countries are ready to resume strong economic growth.
The sceptical outlook is that the economies would have to leap to double-digit growth rates to justify these valuations and that can only mean a bubble was forming.
Emerging markets generally swing more wildly, in both directions, than developed countries do. And each of the big developing economies—Brazil, Russia, India and China, the so-called Bric countries—face weaknesses that could stunt any recovery.
Exports and foreign investment flows, for instance, which are critical for many developing countries, remain anaemic. Government spending has taken up some of the slack, but rising fiscal deficits in places such as India, could limit how much more policymakers can do to stimulate their economies.
For now, there is little talk of caution. In India, the rising stock market surged even more when the coalition government garnered a bigger majority in general election in May. Many analysts say they expect the government to expedite economic changes and infrastructure overhauls.
Madhabi Puri-Buch, the chief executive of ICICI Securities Ltd, in Mumbai, said the country would weather the crisis better than other countries because domestic consumption, the primary engine for the economy, was still growing. Sales for the biggest Indian auto maker, Maruti Suzuki India Ltd, for instance, climbed at least 10% in May.
Investments also are showing signs of revival. Foreign flows into the stock market have turned positive in recent months. Puri-Buch said companies were raising billions of dollars from institutional investors.
“Most companies in their boardrooms would be saying we need to plan for future growth,” she said, “rather than saying we need to batten down the hatches for a long winter”.
But other analysts say the fundamentals of the economy have not improved enough to justify the big rally.
“There is the potential for this new government to make a significant difference in terms of economic reforms,” said Ajay Shah, a senior fellow at the National Institute for Public Finance and Policy. “I would underline the word potential. There are very big gaps between theory and execution, between promise and reality.”
The Reserve Bank of India expects the economy to grow 6% this fiscal, down from an estimated 6.7% last year. Optimists such as Puri-Buch, said economic growth in India could be as high as 7.5%, while the World Bank has forecast 4%.
In China, industrial production has started to recover, and imports of commodities have risen. But the rebound is heavily concentrated in domestic sectors that benefit from the government’s stimulus programme. Exports are still struggling.
An increase in bank lending has prompted a revival of the real estate market and the car market. The government has also offered $1.02 billion (Rs4,814 crore) worth of subsidies to people in rural areas for car and home appliance purchases, contributing to a 14% increase in overall car sales in the first four months of this year, compared with the period last year.
Emerging markets in East Asia are also showing signs of recovering from a steep slowdown in manufactured exports. The Taiwanese economy, for instance, shrank 10.2% in the first quarter compared with the period a year ago, but closer relations with mainland China have improved investors’ confidence.
Central banks across the region are maintaining low interest rates, and some, such as in the Philippines, are still cutting rates to offset weak exports.
In Brazil, which has been hurt by the steep drop in commodity prices, industrial production has risen every month since January, though it remains much lower than the corresponding periods last year. The government is predicting that the economy will grow 1% this year, down from a previous projection of 3.5%. Many independent analysts say Brazil will be lucky to avoid a contraction.
©2009/THE NEW YORK TIMES
Andrew Downie from Sao Paulo, Brazil contributed to this story.