Recent worries that red-hot economic growth in China, India and the rest of the developing world is unsustainable may be overblown, says a new report from Win Thin, senior currency strategist, Brown Brothers Harriman & Co.
While that's likely good news for recently struggling markets, without a rebound in U.S. stocks, it may not be enough to restart the global rally.
"Given what we view as strong EM fundamentals and improving growth numbers, we can see the basis for a strong EM performance during the rest of 2010," said Mr. Thin in a note to clients. "However, much will depend on what’s going on in the US markets, as the correlation remains strong."
The strategist noted a recent Bloomberg report discussing the
parallels between the current emerging market correction and a
two-month drop in the MSCI EM index of 11% in 2004, that was followed
by a 26% rally through the end of 2004.
If a similar rally is to take place this time around, it will likely go hand in hand with a rebound in U.S. stocks, he said, noting a daily
correlation between MSCI EM and MSCI US at .9379,
"[That's] very high but down
from a peak of around .9800 at the beginning of 2009 and again in late
2009," he wrote. "That correlation has broken down from time
to time during the financial crisis, but always seems to rise again
back towards 1.
Recent monetary tightening in China and India has helped hinder world stock markets, with the MSCI Emerging Market Index is down 13% from its peak Jan 11, compared to a drop of 7% in U.S. stocks and a 9% fall for developed markets as a whole. However, it does not appear to be slowing overall economic growth in emerging markets the way many investors have anticipated.
Following a 75 basis point rate hike in January, India still estimates that GDP growth for fiscal 2009/10 ending Mar. 31, will hit 7.2%, up from 6.7% the year earlier. China, meanwhile, is still predicting growth of 10% this year despite recent tightening moves, including a planned increase in bank reserves.
With the exception of Russia, whose economy is expected to grow a relatively weak 3.6% in 2010, most other emerging market countries, including Brazil are also expected to book strong growth.
Ongoing concerns about inflation should result in further tightening in the developing region, but not enough to slam the brakes on projected growth, said Mr. Thin.