Faith in central banks prompts rally in emerging-markets stocks

EMERGING-market equities are heading for a relatively positive finish in this first quarter — an outcome that seemed distant, or even unlikely, in January when global equities were in freefall.

Emerging-market stocks had the worst start to the year on record before bottoming out on January 20.

The market storm, which also hit currencies such as the rand, wiped off more than $2-trillion (about R31-trillion) in combined market value at the time, estimates Bloomberg.

But since then, emerging markets have staged a spirited recovery, thanks partly to expectations of intervention by some of the major central banks, which are increasingly coming under scrutiny as some analysts question the effectiveness of their policy choices.

“A key question is for how long central banks can continue stimulus before they hit the proverbial wall and/or markets lose confidence in their perceived ‘omnipotence’,” said Fabian de Beer, director of investments at Mergence Investment Managers.

Markets have largely calmed down after major central banks, including the European Central Bank, pledged to do more to support stuttering economic growth.

The ECB and Bank of Japan adopted negative interest rates to promote lending and investment. The measure adds to existing bond-buying programmes aimed at shoring up economic activity.

The market turmoil and tentative global growth also persuaded the US Federal Reserve to pause in its ratehiking cycle — a move that has halted a rally in the dollar.

The loose global monetary policy stance has thus triggered a clamour for emerging-market assets that offer better returns.

This has helped the MSCI emergingmarket index gain 19% from January lows as investors filed back into stocks and bonds.

The rally in the emerging world far outpaced developed-market indices including the S&P 500 in the US and Germany’s DAX.

The JSE All Share index has ratcheted up 18% in dollar terms since its trough on January 20, while the S&P 500 and UK’s FTSE 100 have gained 9% and 5% respectively from their recent lows.

The monetary stimulus has propped up global stocks since at least the 200809 financial crisis, but arguably has not had the same effect on the underlying global economy, which De Beer warned posed a real downside risk to financial markets. De Beer said the global economy needed to be in a self-sustaining growth cycle. Outside the US, the global economy has been muddling along at a moderate pace.

The IMF expects the global economy to grow by 3.4% this year, down from the previous forecast of 3.6%, due primarily to a slowdown in emerging economies, notably China.

“The fortunes of the financial mar- kets are still going to be dictated by easy monetary policy in the coming months,” said Craig Pheiffer, Absa Wealth and Investment Management’s head of private clients asset management.

Pheiffer expects more policy easing from the Chinese central bank, which last month reduced the amount of cash that banks must put aside as reserves in an attempt to pump up the country’s slowing economy.

All in all, it has been a tumultuous quarter that looks set to end on a better note.

Resource and financial stocks have mainly been responsible for the rebound in the All Share.

Some mining stocks have more than doubled amid the pick-up in commodity prices, such as for gold and iron. Oil prices, one of the main worries for markets early this year, have stabilised at around $40 a barrel.