MARKETS

Emerging equity markets quick out of the blocks

Emerging equity markets have had a blistering start to the second quarter relative to their developed counterparts, with Chinese stocks in the lead.

The JSE has been impressive, led by revived investor interest in the long-neglected resources sector as industrial and financial stocks took a back seat.

The Shanghai composite index still occupies the top spot among emerging markets despite pulling back by mid-May. It has rallied a mighty 33% since January.

“There have been structural changes, rate and liquidity injections and moves towards a more open market place that continue to unfold in China,” says Lloyd Priestman, a markets analyst at Caleo Capital.

“There is a lot of speculation and individuals are trading on this momentum, which could turn at any point, given the run that we have had over the short term.”

Meanwhile, the oversold JSE’s resource index staged an impressive comeback in the current quarter, boosted by hopes of further stimulus from China, which remains the world’s major consumer of raw materials such as iron ore and copper.

The resources were up 10% from April, outpacing the All Share and major constituent indices like financials, which got off to a flying start to the year before cooling off.

“A big topic of discussion for global markets and for our mining shares continues to be China: how will Chinese growth respond to the consistent yet fairly gentle stimulation from the authorities?” asked Paul Hansen, portfolio manager at asset manager Stanlib, in a note.

Underlying commodity prices have picked up, most notably the iron price, which breached $60/ton — up 25% from its April lows. Still, there are question marks around the economic underpinnings of the broader commodity market.

Developed share markets have so far in the current quarter lagged behind emerging markets. European stocks have been gripped partly by the sell-off in bond markets. That sell-off gave rise to volatility in the currency markets, pushing the rand to lows of R12,30/$ before it recovered to around R11,80/$ in mid-May.

“A number of issues around the world are leading to higher volatility in all markets, including bonds, equities, currencies and commodities. Investors need to be braced for this volatility,” Hansen said.