Equity markets in emerging markets are poised to extend gains

In particular, the markets were buoyed by ECB head Mario Draghi’s comments that the ECB would do everything in its power to defend the Euro and the Eurozone. While this by no means solves the debt crisis in Europe, it does mean that the risk of the currency union collapsing or a major sovereign default by a Eurozone member (Italy, Spain) is off the table for now. In a preliminary ruling, Germany’s Constitutional Court confirmed the ESM treaty as being in line with the country’s constitution and thus removed one more factor of uncertainty. The stock market rally was also driven by the US central bank’s actions. Fed chief Bernanke announced another massive bond purchase programme (QE3). Starting immediately, the US central bank will be pumping around 40 billion USD into the economy every month, for an open-ended period of time. Officially, this is supposed to go on until there is a strong, sustained improvement on the labour market. In light of the upcoming elections, this objective should be well received by the public and there will probably only be limited objections to the ever quicker pace of printing money in the USA. There are some doubts, however, that the labour market is the real objective of the Fed and that this market can be stimulated by measures of this kind. Ultimately, the US central bank is throwing pretty much everything they still have left at this problem. This actually indicates that the looming internal problems for the US economy are much more serious than the bank is admitting publicly. Clearly, the goal is to head off developments similar to those seen in Japan at any cost: the last 20 years in that country have shown how difficult it is to escape from a deflationary spiral once such a pattern has become established. For the first time in a long time, EM shares did significantly better than the markets in the developed, industrialised countries in September. Nevertheless, the report indicated that it would be premature to see this as a reversal of the trend in the relative performance of these markets. While the measures of the central banks may be able to temporarily boost prices at the global level, over the long term, expectations about corporate earnings growth are a more important criterion. The profitability of many EM companies is still falling and many investors will prefer to wait for signs that this trend is turning around. This is even more so the case, as most EM markets are not cheap by any means. A new structurally motivated bull market still does not look imminent on the EM stock markets right now. But for the coming months at least, there should continue to be a mild upward trend on the EM equity markets, thanks to the steady string of central bank stimulus measures. Economic news, central bank measures and the developments in the Eurozone will probably drive repeated sharp ups and downs in share prices over the short term.