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EMEA has outperformed developed nations

Dr Janet Yellen’s nomination has given the markets the reason they needed to restore themselves, and stemmed the slide.

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The fatigue of waiting for Congress to move towards a resolution and lack of US economic data were starting to take a toll. Throughout these political dramas, the EMEA equity markets have held up well despite the constant reminders from the likes of the IMF about the structural problems and political challenges, downgrading growth forecasts in the region from 5.5% to 4.5% this year.

The Yellen announcement was made during Asian trading hours yesterday, giving the region’s markets further buoyancy, from equities to currencies. Benchmark indices from China to India held up and extended their gains from 0.5% to 1.3%. Even the region’s worst performing currency for the year - the rupiah, which has lost close to 9% - gained up to 2.5% at one point, although investor sentiment towards it remain bearish.

EMEA over-performance

We believe the main reasons for the over-performance of the EMEA region in the past week, compared to developed nations, are firstly that China has been largely driving positive sentiment during the Asian sessions. Secondly, inflows might be muted by outflows, capped by the regional markets stabilising. Thirdly, EMEA is most likely to benefit from a pickup in global growth, and investors are looking beyond the debt-ceiling debate.

Chinese stocks listed in the US in the ishares and Bloomberg China US index showed gains of 0.5% and 0.3% respectively. The Chinese consumer story is not to be dismissed, as we have seen during the seven-day-long National holiday. Spending has been phenomenal, from retail to luxury, travel and property.

Total retail sales were up 14% at $142b, property transactions for the seven days rose more than 50% in 12 of the 32 major Chinese cities and there was a 104% increase in Beijing alone. Holiday tourism revenue increased 21% to $36.4b from a year ago. Premier Ki Keqiang reiterated during the APEC meeting that the Chinese economy has strong momentum.

Foreign institutional fund flows into India are up $168m, Indonesia is down $20m, the Philippines up $10m, Thailand down $27m, Vietnam up $7.88m and South Korea up $638m, showing that inflows outweigh outflows by $7.76b for the week ending 8 October. The largest inflow is seen in South Korea followed by India. Outflows for Indonesia and Thailand are more subdued than the exit of funds in August and September, indicating the worst is over.

Challenges

There have been challenges and criticisms of political leaders in the EMEA region, such as the trap of the middle class. An ageing demographic and slowing GDP have also raised concerns, as risks of a slowdown in the region. The main criticism has been weak institutions in emerging-market countries where leaders have spent during the boom times and postponed reforms.

Countries with strong institutions use their revenue prudently through infrastructure spending, to create an environment of sustainable growth in the future. Potential growth for the region is still greater than other regions, and we are seeing some signs of success from the changes Asian leaders have implemented in certain countries.

China’s move towards a consumption-based economy is evident in the services industries’ gauge in September, with an increase to 55.4 from the statistics bureau. Malaysia’s exports bounced up in August by 12.5% year on year, after a string of declines expanding trade surplus to $2.23b.

There are pockets of weakness in the region in countries such as Indonesia, due to the persistently low commodity prices, and Thailand’s debt will weigh on the region.

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