This week we at Bourse review the performance of international equity markets for the first half of 2014 and consider the potential opportunities available to investors.
Investors may recall that around this time last year equity markets, particularly emerging markets experienced a turbulent first half. Global liquidity concerns, declining economic growth and currency weakness all contributed to poor market performance in the 1H2013. The volatility in global markets was further exacerbated by fears of the Federal Reserve’s tapering of Quantitative Easing (QE3) beginning sooner than expected. For the first half of 2014, we see equity markets in positive territories as investors’ confidence return.
Of the 23 developed and 23 emerging market recognised primary indices by a US-based provider of equity, fixed income, and hedge fund stock market indices, the top performing index for the first quarter of 2014 was India’s BSE Sensex Index, posting a market return of 26.3 per cent (in USD terms). Asian markets dominated the best 5 markets list (India, Philippines and Indonesia), whilst soft economic data out of China and pending structural overhauls for Japan placed these markets amongst the worst HY 2014 performers (See Exhibit 1).
Asian financial markets, on average, appreciated 5.3 per cent over the period. Of the major Asian markets by market capitalisation, India continued to outperform. The BSE Sensex 30, India’s benchmark equity index, was up 26.3 per cent at the end of HY 2014, the highest returns in the Asian space, compared to a decline of 8.3 per cent in the comparable period 2013.
India’s strong performance for the first half 2014 has been driven by elections expectations and stronger economic outlook. For the six months ended June 30, 2014, Foreign Institutional Investors (FII) equity inflows to India were over US$9.9 billion, compared to US$13 billion for the comparable half 2013. Notwithstanding the weaker FII flows, the Indian market was the top performer of the top ten largest equity markets (See Exhibit 2). As at July 18, 2014, the Indian Sensex was up 24.2 per cent in USD terms.
Indonesia also performed well from election expectations, registering a return of 19.7 per cent in USD terms, earning a place in the top 5 best performing indices.
The Shanghai Composite Index ended the half year down 4.6 per cent. Mixed economic signs in the first quarter of 2014 encouraged a ramp-up of stimulus measures, aimed at counteracting slower investment, below-forecast exports and a struggling real-estate market. Despite this, China’s GDP still grew at 7.5 per cent in the second quarter, quelling concerns that the economy is slowing.
The Brazilian primary market index has performed well in light of the economic hurdles faced by the economy, appreciating 10.3 per cent in USD terms. The imminent October 2014 presidential elections have fuelled investors’ hopes for a more investment-friendly monetary policy stance. The positive impact of recent elections on the emerging economies’ equity markets of India, Colombia and Indonesia offers a possible silver lining for Brazil in 2014. As at July 17, 2014, the Brazilian IBovespa Index was up 13.8 per cent in USD terms.
With the World Cup buzz over, the country looks forward to hosting the 2016 Summer Olympics.
Mexico’s primary stock market index has remained relatively flat, appreciating only 0.21 per cent for the first six months of 2014. Several international research providers view 2014 as a transitional year for the country and are optimistic that Mexico’s economy will benefit from the historic reforms that are currently underway. Notably, the opening up of the energy and telecommunications sectors to international players is expected to dispel long-standing monopolistic inefficiencies, generating considerable growth with the effects being fully realised in 2015.
Colombia’s primary index has responded positively to the favourable election outcome in June 2014. Volatile commodity prices continue to impact the Andean states, as movements in copper prices drove Peru’s equity markets and falling metal prices subdued Chile’s markets.
The US Rally Continues
The S&P 500 index has seen a sixth consecutive quarterly gain ending HY 2014 at 1960.23, a 6 per cent appreciation. Year-to-date as at July 17, 2014 the S&P 500 was up 5.9 per cent. Despite the steady advances, the index experienced less than half the appreciation during the same period last year, when S&P 500 saw an upside of 12.6 per cent for the first half of 2013. The stock market rally has mainly been attributable to the Federal Reserve’s decision to maintain low interest rates throughout the rolling back of its Quantitative Easing (QE) programme, scheduled to end in October 2014. The US markets have also responded to positive employment and housing data adding to the optimistic outlook on the economy. Analysts estimates project an additional 1.5 per cent upside on average for the S&P 500 by year-end 2014.
The European region continues to be affected by political and economic uncertainty. The on-going Russia-Ukraine crisis has prompted some European nations to limit interactions with Russia through further sanctions or reduced trade with the region’s largest emerging market. The European Central Bank (ECB) continues to implement monetary stimulus to incite economic growth. The IMF expects growth in the Eurozone to be 1 per cent for 2014.
A Good Time to Invest?
For investors with medium to long-term outlooks, the international equity markets present several opportunities. Access to international equity markets can be achieved through direct equity purchases, Exchange Traded Funds (ETFs) or any of several locally listed mutually funds focused on international markets.
Countries/regions experiencing market corrections or facing uncertainty through geopolitical events may offer clients an encouraging entry point into these markets. In a similar vein, investment destinations which are gaining momentum could also provide investors with a chance to benefit from upward trajectory through improving economic and market sentiment.
Equity investments are one of the riskier and ultimately more rewarding investment asset classes, characterised by swings in market prices. Investors should, as always, consult with qualified investment advisors, such as Bourse, when deciding which equity investments are best suited for their risk appetite and portfolio.
For more information on these and other investment themes, please contact Bourse Securities Limited, at 628-9100 or email us at Research@boursefinancial.com.
The production of this publication is not to in any way establish an offer or solicit for the subscription, purchase or sale of the any securities stated herein to US persons or to contradict any laws of jurisdictions which would interpret our research to be an offer.