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Are Emerging Markets Rising from Their Funk?

By Ashish Advani   |   Wednesday, 31 Oct 2012 08:11 AM

We might be seeing the first consistent signs of emerging markets getting out of the slowdown funk that has plagued them since earlier this year. There are signs in multiple countries in multiple regions, all pointing to an end to the slowdown.

In late spring, we noticed a definite slowdown malaise that seemed to affect the entire globe. We all were aware that the Western world was tapped out and that growth was tepid at best. The United States, the United Kingdom and Europe were all struggling for their own reasons. Australia showed real slowdown due to China inflicting a slowdown on itself. Consequently, we had a real slowdown all over the globe.

But we are now seeing a renewed enthusiasm take hold around the various parts of the emerging markets. Brazil's performance has diverged sharply from the other Latin American markets. Mexico’s has shown real resilience — with solid growth, stable inflation and improved competitiveness, which is quite impressive.

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Russia continues grind through with an upward bias, and Turkey’s path has been divergent from the other Eastern European markets where the euro area crisis is still prevalent.

India as well as Southeast Asian countries that are not directly linked to China are showing signs of sustained higher level of economic activities.

While I concede that these are very early signs, I am encouraged by the fact that I am seeing all of these signs in several divergent parts of the world. It gives me hope of a sustained turnaround in the economies. It is beginning to look very much like March 2009 when the rapid recovery of the emerging markets halted the economic collapse in its tracks.

One of the measures that I track is the Producer Managers’ Index (PMI) data that is being released around the world. PMI’s are a good indicator of coming growth in the country. Mexico, Brazil, India, Turkey, Indonesia and Thailand are all showing positive PMI, which is a good collective sign.

Even the U.S. gross domestic product growth for the third quarter was 2 percent, which was slightly higher than consensus estimates. Now I do not believe that the United States is out of its funk, but hey, a less-than-pessimistic data reading beats a downtrodden number any day. The United Kingdom has seen a slight increase in its output, which I suspect is going to be short-lived.

All in all, the West still shows signs of stress, while the emerging markets are showing signs of life again.

The lynchpin of global growth is China. Many emerging markets get a strong push when China does well. The past few months have been difficult for China, as it intentionally slowed down its red-hot property markets and battled inflation. Early indicators lead me to believe China has successfully navigated the self-induced slowdown and has been able to avoid the hard landing some analysts predicted.

The last month or so have, however, provided the first indications of possible stabilization. China’s trade, industrial production and profits data were all better than expected, and the flash reading of the PMI rebounded last week.

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South Korea’s export reading for October combined with better related growth data from Taiwan in September also fill me with hope. Iron ore prices have also begun to rebound lately. The Chinese yuan has also hit a 17-year high in recent days, and while an ascent to the glory days of 2009-10 in China is unlikely, it is now turning the corner and has seen the bottom of its slowdown phase.

I am beginning to get excited and once again look Eastward to re-evaluate my investment portfolio.

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