HK/China markets had a choppy week along with global equity markets. Weak U.S. jobs and property data, and a cautious outlook from Fed Chairman Ben Bernanke sparked a sell-off of risky assets globally.
In China, the government announced several policy initiatives that tighten its grip on the banking, energy and healthcare sectors, negatively impacting market sentiment.
Investors are also expecting another round of rate hikes in China this month.
Indian markets ended the week flat. It is believed that inflation for the next three months will remain an issue for India, although these concerns are expected to be eased in H2 post a normal monsoon in June- July.
Globally, although economic data is weakening, it is not expected that there will be a sharp fall, and soft economic data in the near term may provide a cap for commodities prices. Analysts will continue to use market weakness to add to companies where demand momentum remains healthy, such as IT or financials, and where valuations are factoring in extreme pessimism.
Brazilian CPI will be released this week and the strength of the short run slowdown will remain on the radar. The most important economic event this week on the Brazilian economic calendar is the Monetary Policy meeting (Copom), when the level of the Selic rate will be decided. Another two increases of 25 bps are expected, with Selic rate ending 2011 at 12.50 percent.
Russia did a near-action replay of Friday’s session, trading with some volatility before rallying into the close. Gazprom was again the big mover in energy, gaining 2.4 percent, with nearly all the gains coming in the last hour of trading.
The RTS index had returned an impressive 19 percent year-to-date, outperforming the MSCI EM index by 11 percent before the April and May sell off.
The performance was mainly driven by rising oil prices, which strengthened Russia’s economic case and attracted fund inflows into the market.
The oil and gas sector returned 24 percent year-todate, thus contributing 85 percent to the overall RTS return.
Historically it has been domestic stocks that have been more correlated to the oil price than has the energy sector. The current trend is the opposite, however we believe it will reverse making the investment case for domestic stocks more attractive.
Ruble’s gains suggest factoring in sector sensitivity. The ruble firmed 10 percent in the first four months of 2011 against the dollar, a trend we believe is likely to continue.
This will have mixed implications for the Russian equity market. Domestic oriented names are the least sensitive to ruble strengthening. We expect a stronger domestic picture to emerge later in the year, while global market concerns will affect all markets through the summer.
This should allow investors to focus more positively on Russian domestic and infrastructure themes. How quickly this positive picture is translated into higher stock prices will depend on global market conditions, which are likely to become more turbulent before any calming can take place.