Market Review: Developing Markets

The broad emerging market universe continued to fulfill its function as a high beta play on the developed world, and has now risen by around 70% from its low in early March. The rally from the bottom has been one of the most violent in emerging market history. Yet despite the rally, markets remain more than 40% down from their peak in October 2007.

May was different in character from April, with the strongest gains seen in resource and materials stocks, while consumer staples and telecoms lagged. Asia too dragged its heels, with the regional torch borne by EMEA and closely followed by Latin America. All this is a portent of green shoots in the Chinese economy, with rising commodity prices responding to perceptions that things are improving in Asia’s powerhouse. In truth, the rally from a deeply depressed level suggests that the rate of economic decline is decelerating and that the vicious destocking of the first quarter has run its course. In this sense there should be some good data emerging from Aurora’s universe in the months ahead. This does not mean though that we are at the start of a coordinated global expansion. Consumers (and governments) in the developed world are still shackled by debt and the recovery is likely to be intermittent and vulnerable.

In the meantime, bond yields have risen around the world in further evidence that the risks in the system may be tilting more towards inflation. This is uncomfortable for those expecting a return to normal conditions.

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