Home Article Growing tension in the Northern Hemisphere favors emerging Southern Hemisphere markets

Growing tension in the Northern Hemisphere favors emerging Southern Hemisphere markets


Tension between the United States and North Korea directly harms the South Korean market. But it also harms China and Russia, members of BRICS, while Brazil is seen as an opportunity, “the flavor of the month” so to speak.

The launch of another missile by North Korea and the U.S. economic data released today, did not hit the Brazilian stock market.

But at the same time, Northern Hemisphere investors are also concerned that the unwinding of the US Federal Reserve balance sheet may lead to the strengthening of the dollar and to a larger exodus from emerging markets like India.

Overseas funds have soured on Indian equities since the beginning of August because of rich valuations and slower-than expected corporate earnings recovery, prompting them to look for opportunities elsewhere.

They’ve sold Indian stocks worth a net $2.66 billion between August 1 and the third week of September, making it the most that’s been pulled out of any major emerging market that discloses portfolio flows during that period.

The outflows exceeded those from major emerging markets, such as South Korea, Taiwan, Indonesia and South Africa, according to Bloomberg and ETIG data. Brazil, however, has bounced back, with investments of $2.17 billion in the same period.

“For the first time this year, we are seeing India deviating from the EM (emerging markets) pack, with FIIs (foreign institutional investors) selling for more than a month,” said Sanjay Mookim, India equity strategist at Bank of America Merrill Lynch.

During the previous week Ibovespa, the Brazilian benchmark stock market index, rose 1.47% to 75,756.51, setting a fresh record closing high as investors bet that the new criminal complaint against President Michel Temer is too weak to disrupt their positive expectations of the Brazilian economic recovery.

Brazil’s Bovespa index has risen 13.66% since the beginning of August until September 21, compared with the Nifty’s 1.49% fall in the same period. But for purchases by domestic investors to the tune of R$ 25,500 crore since August 1, the fall in Indian stocks would have been sharper. “India has been the consensus overweight for a long time, so maybe it is time to have a more neutral weight now and look for opportunities elsewhere,” said Alava.

While this was going on, it was a week of losses for the Indian stock market. Strategists said stability in commodity prices in the past two months may have also led to improving earnings expectations in these markets. “Other emerging markets, including Russia, Indonesia, Malaysia and Brazil, have seen the benefits of higher commodity prices leading to robust export growth,” said Abhay Laijawala, head of research at Deutsche Equities India. “So earnings growth has returned to these markets, unlike India where export growth doesn’t impact the overall market as much.”

Foreign investors are likely to remain net sellers and may continue to allocate funds to other emerging markets in the coming days, Laijawala said. Even though Indian benchmark indexes have scaled new heights recently, a comparison of the Nifty’s performance with that of other peer emerging market shows that the Indian index has under-performed the MSCI EM index, which is up 27.8% for the calendar year.