HSBC Q2 outlook for emerging markets stocks

by | April 18, 2013 10:59 am



The environment for equities in emerging markets is becoming more difficult but the developing world consumer remains a bright spot, according to John Lomax, head of global emerging markets equity strategy at HSBC.

A growing inflation problem in emerging markets is not getting better, on the contrary, “over time it is likely to become worse, but the developing market consumer sector benefits, rather than being hurt by inflation,” Lomax said.

Lomax says that the developed world, with sovereign debt and political constraints gradually being pushed to the side, is in the right side of the cycle to allow positive equity performance, while in the emerging world the output gap is generally much smaller and easy money in rich countries feed inflationary pressures, creating a “less constructive environment” for stocks.

Inflation matters because central banks might tighten policy to counteract it but also because if central banks respond insufficiently, labour and other costs will tend to rise, squeezing corporate margins, at least in the tradable sector.

“Non-tradable sectors, where there is more ability to raise prices in response to cost hikes, may show more margin strength,” Lomax wrote in his strategy outlook for the second quarter.

As the consequences of the protracted financial crisis affect developed markets, the developed world “is gradually pricing itself back into global product markets, which overall seems likely to create significant challenges for many emerging markets corporates,” he said.

“It could be argued that just as the developed world consumer rescued financially distressed EM after the Asian crisis, this is now happening in reverse. The EM consumer is playing an important role in rescuing a financially distressed developed world.”

The largest overweight equity position on any country for HSBC is Turkey, which “continues to benefit from the local and international cycles as well as a strong secular growth story.”

The HSBC strategist is also overweight on Egypt, where a deal with the International Monetary Fund if it is concluded “has scope to provide an initial market catalyst.”

“There is considerable pent-up demand both on the personal and corporate side, and this should progressively come through in the face of greater political clarity,” Lomax said.