Investors shun emerging markets

Those expecting a strong start in the stock market for January have been met with malaise.

Emerging markets that have underperformed the developed markets are continuing to face challenges.

The EEM ETF, which is an indicator of the emerging markets, has shed close to 5% in the past three days. The last time this level of aggression in selling was seen in May 2013 when taper talks first emerged. One of the reasons there has been an exit from the emerging markets is that the economies are not expanding at the rapid rate it used to.

This morning’s HSBC Emerging Markets Index, showed a drop to 51.6 in December from 52.1 in November. This is in line with aggregate emerging markets GDP, which has been on a decline since hitting a peak in 2010.

In comparison, the developed nation’s fundamental growth in emerging markets appears to be lagging. The bright spots for the developed countries in manufacturing is the US and UK, as seen in the JPMorgan global manufacturing PMI for December. In Asia, Taiwan was the only country that showed strength in the manufacturing output index, hitting a 32-month high. Foreign investors also feel the same way about Taiwan’s equity markets, where fund flows have accelerated into the country during September to December last year.

China so far has been showing moderate signs of growth in both its services and manufacturing. The shift towards a more sustainable growth with domestic demand and away from exports will take time. The investment community understands the necessary slowdown in China and there is a tolerance of this model as long as the output remains above 50.

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