The past year has again highlighted the reason why blindly following the benchmark may not be the be...
The past year has again highlighted the reason why blindly following the benchmark may not be the best way to invest in the EMEA region: three of the worst-performing markets over the past 12 months are also some of the largest.
Israel, South Africa and Turkey make up more than two-thirds of the MSCI EM EMEA Index. By contrast, some of the smallest components, such as the Czech Republic and Hungary, are among the best performers.
Recently, the Bank of Israel raised its discount rate to 9.1%, the third consecutive rise in June, to combat rising inflation. The central bank is trying to regain its credibility and the market welcomed this move, with the shekel strengthening against the US dollar.
The ministry of finance projects a real GDP growth rate of -1% for this year. With the security situation failing to get better and few signs of a recovery in tech exports to the US, the market continues to be unattractive.
As expected, the South African Reserve Bank (SARB) raised rates by 100bps to 12.5% in June to curb inflationary pressures stemming from currency weakness in the fourth quarter of 2001. Inflation increased 9.2% year-on-year in May, up from April's 8.8% increase.
From the SARB's hawkish comments, it looks like a further interest rate hike is possible at the next meeting in September. That said, growth prospects are a concern given the recent hikes in interest rates, with additional increases possible.
During the past quarter, Turkish equities fell sharply on worries that prime minister Ecevit's health problems could lead to early elections. This was further exacerbated by National Movement Party leader Bahceli's threats to leave the coalition over EU accession reforms.
However, there were encouraging signs on the economic front, with better than expected GDP growth and inflation figures for the first quarter of 2002.
While most of the larger index components have failed to impress over the past 12 months, Russia (17% index weighting) has been the exception. However, there was a sharp sale of Russian equities in June, triggered by global tensions, that left shares 20% below their May high.
In central Europe, the main news on the political front has been elections in Hungary and the Czech Republic. Encouragingly, both new governments have stated that EU membership in the first wave is a top priority.
So far this year, the National Bank of Poland has cut interest rates by 300bp.
This reflects progress in disinflation and the sluggish pace of economic activity. The bank has lowered its year-end inflation target range to 2%-4% from 4%-6%.
Radical structural change and attractive valuations make for a positive long-term outlook for the EMEA region.
However, recent global events have reduced appetite for risky assets and could affect sentiment in the short term. In central Europe, the convergence prospects should underpin continued support for these markets.
Profound structural changes.
Attractive valuations available.
Convergence prospects in central Europe.
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From June 2019