The correction in the world’s emerging stock markets continues.
At noon in London today, January 27, the MSCI Emerging Markets Index was down 0.5%. That brings the index’s six day retreat, the longest slide in a year, to 7.8%.
There’s just enough news of tighter lending from China and signs of higher interest rates from Brazil and other emerging economies to keep markets on edge. As of noon in London the MSCI Asia Pacific Index was down 1.1%. The eight straight days of losses is the longest losing streak since May 2005. The Shanghai Composite Index was down 1.1%.
The worry on China is that curbs on bank lending, which have seen some of China’s biggest banks effectively stop lending, and increases to reserve requirements will go too far. The government wants to take some of the air out of speculative bubble in real estate and stocks and temper the recent trend toward higher inflation. Investors don’t really know how far the tightening will go.
 But it’s important to remember, as you try to figure out China’s stock market for yourself, that markets always go to excess.
 In a bubble that excess is on the upward side. At a time like this it’s on the downside. The Shanghai Index, which has dropped below 3,000, is now below its 200-day moving average for the first time in two years.
I certainly understand the fear—exactly, in my opinion, the kind of stock market reaction Beijing hoped to induce by its recent moves–but I don’t see a change in the economic or monetary fundamentals in China. And on past history the Chinese government isn’t likely to let this slide go so far as to damage economic growth.
China’s markets aren’t the only ones falling right now. The Bombay Stock Exchange lost 2.9% on fears that this week’s meeting of the Reserve Bank of India will result in higher reserve requirements for banks. Brazil’s central bank will probably leave interest rates alone at its meeting but signal that it will increase rates as early as April in an effort to keep inflation from hitting 5% by the end of 2010.
This short-term pain in emerging markets is, in my opinion, a good thing. In the beginning of the year investors were worried that these markets were running too far, too fast and headed toward a bubble. For the moment, at least, central banks from Brazil to India have let some of the air out of that potential bubble.
I remember reading about the Brazilian gov’t imposing a tax on foreign investments to slow growth/inflation. Was this ever put into effect? If so what are the consequences as they relate to ETF investments like BRF, BZF, ILF?
nextus…lula has done wonders for b’s economy and the growth potential is awesome. He IS heavy handed but it is not a democracy after all. I do worry about if he is ousted…I watch the stability of his regime..only flack comes from large criminal concerns in Rio..not sure how much political push they have but could be dangerous later..say after 2016 olympics.
Geobric. That my concern too. Chinese policy is not focusing on the right thing, it may lead to a much longer and painful process.
ABV sure is looking good to me right now
Hi,i don’t trust the brasilian political sistem.I don’t like Mr.Lula.I’d like to know more about Chile equities.Could you give us any information about that?Thanks.
NB— Whether your right or wrong it sounded really good!!! Thanks, and it does make sense now that you pointed out the Small cap and large cap.
I agree with Jim that the correction in emerging stocks which went up too much too soon and the tightening in China which is in risk to have another over-heating are GOOD thing. I won’t buy the emerging market until it drops little more.
By the way, I am watching ILF.
@taterbug820
This is my understanding:
BRF – Small Brazialian companies (hence concentrated across a specific set of companies)
ILF – Concentrates on 40 Latin Amer stocks. I imagine, large companies.
Depending on your thesis and where you want to play, both are the right picks for that region. As an economy Brazil attracts a lot of attention and BRF allows you to play that slice. If you want a more diverse play across countries, then ILF could work. Again – I could be wrong, just my 2c. I am not an expert.
It seems that BRF is talked about quite often but ILF seems to hold more of the “Picks” and “Watches” on this site. I don’t see ILF talked about? Can anyone expand on this?
Jim,
are you sure we are not in an “L” type recovery?
Jim,
Would you nibble at names like VALE just yet?
I think you said a BRF could be nibbled at these levels, but was interested in knowing your stock specific picks from a timing perspective.
TIA.