beyondbrics

It has been a torrid year for emerging markets and there have been very, very few success stories. Amid fears of a global recession and huge volatility across markets, investors have fled even remotely risky assets. That has spelt disaster for EMs.

The MSCI emerging market index has fallen 21.5 per cent since January and there have been very few economies which have escaped that trend.

The MSCI Latin American index dropped 21.5 per cent while the MSCI Asia (ex Japan) shed nearly a fifth of its value. MSCI’s eastern Europe index fell 25 per cent as its members suffered for their proximity to the eurozone.

And it’s not as if EM markets have any global trend excuses to fall back on – the S&P 500 traded flat in 2011 and even Europe’s markets “only” dropped 12 per cent.

As Jonathan Garner of Morgan Stanley told beyondbrics: “Emerging market equities have underperformed developed market equities by 15 per cent over the last 12 months.”

Even within the EM gloom there were dark and bright spots. And the fight for biggest EM loser of the year was particularly fierce.

However, on careful reflection beyondbrics unanimously chose India to receive the dubious award.

India’s benchmark Sensex index led Asia’s fall in 2011, losing a quarter of its value to record its second worst year ever – no real surprise considering India’s persistently high inflation and struggling currency, its series of seven compensating interest rate hikes (13 since March 2010), and its stalling economy.

Snapping at India’s heels were Hungary and Egypt where social and political unrest have led to severe market turmoil. Both countries are staring at balance of payments crises as their currencies suffer and their reserves diminish. And neither looks likely to receive the external funding they need any time soon – repeated downgrades by all three credit rating agencies have only underlined their problems.

Egypt’s benchmark index has lost nearly half of its value in 2011. And Hungary’s Bux index has shed over 20 per cent while its currency, the forint, has  tumbled over 10 per cent against the euro – its biggest yearly decline on record.

Other noteworthy, albeit illiquid, under-performers included Nairobi, which saw its headline index plunge over 30 per cent, Kazakhstan, where political unrest spurred a 35 per cent fall in equities, and Ukraine which saw 40 per cent of its main index wiped out in 2011.

As Charles Robertson, chief economist at Renaissance Capital, told beyondbrics, Ukraine’s problems are especially varied:

It failed to respond with a credit rate hike to defend its faltering currency, failed to sign an EU-association agreement due to the Tymoshenko situation and it has an ongoing energy problem with Russia. Its banks are also undergoing massive deleveraging and it is reliant on its steel industry which is suffering as China slows.

EM winners were harder to spot and any accolades are very relative.

Again, there were illiquid markets which saw massive moves – Venezuela’s bourse jumped some 77.5 per cent while Zambia’s Lusaka stock exchange recorded a 26 per cent jump- but they were the exceptions.

The biggest winner in Latin America, bar Venezuela, was Mexico which outperformed the MSCI LatAm index by some 18 per cent – however, that still equated to a drop of 3.7 per cent.

Robertson pointed to Nigeria and Ghana as Africa’s 2011 success stories. Although both saw their main indices shed value (5 per cent in Ghana and 16 per cent in Nigeria) he was optimistic that Nigeria’s peaceful elections and Ghana’s oil-find would pay dividends in 2012.

As Robertson noted, “Ghana has made it to middle-income country status”.

However, this year’s biggest winners came from south-east Asia. The Philippines was the regions best performer – up 4.1 per cent in 2011 – but beyondbric’s EM champion for 2011 is Indonesia.

Indonesia’s markets may have gained just 3.2 per cent over the year but its return to investment status by Fitch Ratings in December and its strong fundamentals, driven by domestic demand, underline its recovery and potential.

As Robertson said, “it might not just be Indonesia’s year; it might be Indonesia’s decade.”

Related reading:
Kazakhstan unrest leaves 14 dead, FT
Indonesia’s belated super-regulator, beyondbrics
Indonesia’s banks build on their heady valuations, FT