market equities have outperformed equities from the developed markets.
This Great
Graphic, composed on Bloomberg, shows the MSCI Emerging Market equities
(yellow line) and the MSCI World Index of developed equities (white
line).
Both time series are indexed as to June 15, but they were at nearly identical levels
as the UK voted. The developed market equities fell more than
emerging markets. The UK and Japanese stocks were particularly hit, and the drop in yields saw financial stocks
get crushed.
The decline in yields and the likely policy
response in the UK, Japan, and possibly the ECB, encouraged flows into emerging
markets. The BOE did change policy yesterday, though it did reduce
the required capital buffer for UK banks. The BOE is widely expected to
ease policy–not limited to a 25 bp rate cut– next month. Speculation
has surfaced this week, after the Japan’s upper house election, of aggressive
monetary and fiscal action (helicopter money?).
The decline in European interest rates, and
German rates, in particular, means that fewer German bunds are available to be
purchased under the ECB’s asset buying program. Some are
speculating (though we are skeptical) that the ECB could move away from the
capital key (driven by population and GDP) toward a debt key, which would be seen as easing policy in the sense of
purchasing lower quality assets.
In the first half of July, foreign inflows
into South Korean and Taiwanese equities have been particularly strong.
Foreign investors bought $1.86 of South Korean equities here in July. This is equivalent to 35% of their year-to-date
purchases. Foreign investors bought $2.02 bln of Taiwanese shares in the
first half of the July, which is about 25% the inflows this year.
Although the dollar amounts are considerably
smaller (as are the markets), but the foreign demand for Philippines and
Thailand equities has been proportionally just as strong. Here is
July, foreigners bought 29% of the Philippines stock that they have bought all
year. In Thailand, the figure is closer to 37%.
Another emerging market that caught our
attention was South Africa. Foreign investors bought $1.69 bln of
South African equities this month, accounting for 84% of this year
purchases.
The best performing large developed market
this month has been Japan, where the Nikkei is up 5.9%. Spain’s 4.4%
gain puts it in second. Luxembourg’s market is considerably smaller than
Japan or Spain, but it is up 6.3% this month, and Austria is 5.6%.