Just when emerging markets were riding high, led by bounces in Asia (China), Brazil, and the optimism in India after the election result earlier this month, along comes the madmen of North Korea to literally cast a pall over this sunnier outlook.
Asian markets fell yesterday after North Korea said it conducted a nuclear test.
Most later recovered, including Japan. South Korea remained in the red.
European markets rose. the UK and US were shut for holidays.
"North Korea conducted a nuclear test today," the communist nation’s official Korean Central News Agency said. The underground test was “successful,” according to the report.
Markets across Asia fell after an early rise at the start of trading.
The news is destabilising, with the MSCI Asia Pacific Index up 40% since the five year low on March 9. News of the test won’t help add to that level of confidence.
Especially when, according to reports, North Korea indicated that the bank was bigger than the first ‘test’ in 2006.
“The current nuclear test was safely conducted on a new higher level in terms of its explosive power and technology,” the official Korean Central News Agency said in a statement.
Three short range missiles were also fired in a further act of defiance.
Bloomberg said the US Geological Survey said on its Web site a magnitude 4.7 earthquake was recorded in northeastern North Korea at 9:54 am local time yesterday. The quake struck 10 kilometers below the surface about 375 kilometers northeast of Pyongyang.
It could be just the factor that encourages investors to grab some of their profits from Asian emerging markets.
Those profits are considerable.
Merrill Lynch’s May Global Investment Managers report found that "A net 46 percent of investors are overweight emerging market stocks, up from a net 26 percent in April.
"Bullishness about China’s economy has reached its highest level since the survey began tracking China in 2003."
And Reuters reported that EPFR (a company which tracks fund flows in global investment groups) said in its statement late last week that emerging equity funds had soaked up $US2.46 billion in the week ended May 20, thanks mainly to China’s economic growth targets, India’s reform-friendly election result and the continuing commodity rally.
It noted that since the second week of March emerging equity funds tracked by it have posted collective inflows of $US21 billion while their developed country counterparts have posted outflows of $US14.1 billion in the same period.
Of emerging equity funds, Asia again posted the biggest inflows of $US933 million and $US6.9 billion year-to-date.
Latin America absorbed $587 million thanks to the commodity rally, but Europe and the Middle East and Africa (EMEA) continued to lag, with just $US41 million.
With these sort of fund flows over the past two months, it’s no wonder investors are jittery.
They have tended to look at the potential of the region and emerging economies later in the year, rather than the reality of current performance.
It’s why the still glum news about the Japanese economy hasn’t stopped that market advancing more than 20% this year, which is hard to understand when the data flow suggests at best a steadying and perhaps a bottom in the slump, not a rebound.
Take Thailand’s economy. Exports, one of its two mainstays (tourism is the other) fell 20% in the first quarter and have dropped for six months in a row to the end of April.
The unrest earlier this year has added to the impact of the global trade slump by hurting tourist income and the latest figures show the Thai economy contracted by a rather nasty 7% (annual) in the first quarter.
Gross domestic product fell 7.1% last quarter from a year earlier, after dropping by a revised annual 4.2% in the December quarter.
The economy contracted 1.9% in the March quarter from December.
But with the unrest settled (for the time being) it seems economists are now looking for a 4th quarter rebound, thanks to government-boosted spending, cash handouts and public works.
The Bank of Thailand last week didn’t cut official rates, leaving them steady at 1.25%.
Thai manufacturing fell 14.9% (hurt by the slump in car exports), compared with a revised 6.7% in the December quarter.
Private consumption fell 2.6% and total investment slumped a sharp 15.8% which, like Japan, where a 10% slump occurred, is the real worry for future growth.
Even though GDP may fall by up to 3.5% this year, the feeling now is that the worst is over.
The Bank of Japan raised its view that the Japanese economy had bottomed and would start recovering later this year.
Singapore and Taiwan last week said their economies may be past the worst
Singapore’s news was better than initially thought: still a sharp fall in growth, but nowhere near as bad as the first estimate.
The country’s government said last week that GDP contracted by an annual 14.6% in the first quarter of this year from the December quarter after contracting by an annual 16.4% in that quarter from the June quarter.
But the original estimate for the March quarter was for a fall of 19.7% on an annual basis.
The government still expects a 9% contraction this year, while the IMF says it wi
