Will Energy and Commodities Keep Driving Emerging Markets?
JAN VAN ECK: U.S. equities were affected because corporate earnings turned positive only when energy companies started recovering in the third quarter. In fixed income, high yield improved after investors realized that the energy companies were not going bankrupt. Emerging markets — equities, fixed income, and foreign exchange — all bottomed because they are essentially driven by commodities. We think the commodities recovery will continue in 2017, which means that a bull market in emerging markets is gaining momentum.
In this part of the series, we’ll discuss how the commodity market has affected emerging markets including their present outlook.
Commodity-rich emerging market
Emerging market economies are very vulnerable to the decline in commodity prices. Commodity-rich emerging market nations like Russia and Brazil have recorded a slowdown due to lower demand from China. Weakness in China, the biggest commodity importer, led to a plunge in commodity prices in late 2015 and early 2016 before bottoming out in 2016. At the same time, the low oil prices have been an incentive for both the commodity importing and exporting nations. Commodity exporting nations could benefit from higher sales volumes due to increased demand following the dip in prices.
The S&P GSCI (or Goldman Sachs Commodity Index) has generated a five-year annualized return of -15.7%. The S&P 500 peaked with a return of 13.5%. The S&P Municipal Bond High Yield Index and the S&P Emerging Markets Core have generated returns of 6.4% and 1.5%, respectively. The S&P 500 Energy barely managed a return of 0.9%.
On a year-to-date basis, the S&P Emerging Markets Core beat the rest with a return of ~10%. The S&P GSCI recorded a return of -6.3%. The S&P 500 and the S&P Municipal Bond High Yield Index returned 6.7% and 2.2%, respectively. The S&P 500 Energy Sector generated returns of -7.1%.
We can infer from the chart above how the emerging market exports and corporate earnings have gradually started recovering and have been in an upward trend along with the commodity market beginning at the end of 2016.
World Bank’s growth projections
Commodity-exporting emerging and developing economies are expected to grow 2.3% in 2017 at a growth rate of 0.3% in 2016. Brazil (EWZ), Russia (RSX), and China (FXI) are projected to record growth rates of 0.5%, 1.5%, and 5.6%, respectively, in 2017. Emerging market (EEM) (VWO) and developing economies are expected to record growth rates of 4.2% in 2017 versus 3.4% in 2016 driven by commodity prices.