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Financial markets

Withdrawal from emerging markets

by Peter Hauff

In brief

Euphoria is over: stock exchange building in Dalal Street, Mumbai

Euphoria is over: stock exchange building in Dalal Street, Mumbai

The interest of international investors in emerging markets’ stock market has lately decreased significantly. Many shareholders now “flee” from Asia, Latin America and Eastern Europe.

In mid March, the daily newspaper Le Monde cited the French investment bank Natixis saying that approximately € 29 billion were withdrawn from emerging markets since the beginning
of the year. Last spring, those stock ­exchanges still recorded a comfortable average growth of $ 165 billion a month, according to the bank’s study. In Istanbul, Shanghai and São Paolo in 2009 and 2010, returns of 50 % to 80 % were possible. In January, however, experts reported that emerging market returns were 12 percentage points below those of advanced nations.

Most affected is the Stock Exchange of India. The benchmark index in Mumbai fell by 12 % in January. The stock exchange Bovespa (Brazil) lost three per cent. The only BRIC country with gains was Shanghai with a plus of 2.4 %.

The downward trend has been triggered by inflation. Since the end of 2010, the prices for all commodities worldwide have been rising. Especially affected are cereals, sugar and cocoa.

Disasters in Japan

Although the earthquake and tsunami in Japan will work against rising oil and crop prices, experts expect that, in the long run, basic living costs will increase worldwide. Around 30 % of private household budgets in developing nations is spent on food. Therefore, the Chinese government raised the minimum wage by a fifth in 2010, and Beijing intends to continue increasing the minimum wage by 13 % this year. Nonetheless, the gap between rich and poor is widening.

All summed up, the experts of the ­Orga­nisation for Economic Cooperation and Development (OECD) still believe that future global growth will predominantly take place in BRIC countries. According to the OECD’s forecasts, the emerging market countries will account for about 60 % of global GDP from 2030 on.

New financial crisis more likely

The retreat of investors from formerly booming regions could increase the risk of a new “bubble” in the international financial market. The risk of a crisis for the entire world economy is greater now than in 2008, warned leading economists from the International Monetary Fund (IMF) in a 9 March ­paper: “In fact, as large banks acquired failing institutions, concentration has increased on average.” The five largest banks from 12 countries now manage an average of 335 % of GDP ­in their home countries. Before the financial crisis, the figure was 307 %, the IMF experts stressed.

In Germany, the modest national growth of the past months is outshining all potential economic fears. Investors lack of interest in emerging markets, argues the Association of German Chambers of ­Industry and Commerce (DIHK), proves that markets are still working: “Some investors fear an over-heating in BRIC countries”, says the DIHK’s Ilja Nothnagel. In his view, emerging markets are in for slower growth, whereas the economies in Germany and the U.S. are restarting, so “portfolios are being restructured.“ (ph)