Since March, after the previous rises in prices, the international stock markets have been characterized by a phase of consolidation. On average, emerging market equity markets have been slightly weaker than developed markets. Central and Eastern Europe recorded above-average declines; this is not, however, unusual after the sharp rises in prices recorded previously. An upside exception to this scenario were, however, mainland-listed Chinese equities (A-shares) which gained more than 10% and thus continued the impressive price rally of recent months. Among the losers we find, on the other hand, countries such as Turkey, Greece and several Gulf countries. While the economic data in the euro area are improving slightly, the US economic indicators continue to follow the trend of recent weeks and in most of cases were lower than expected. Finally, for the global economy this means a situation that has changed little with continued weak growth, and where, however, the risks of further slowdowns in growth continue to exist, particularly in emerging countries. For global commodity prices, there is still no reversal in sight, despite the trend towards a stabilization in crude oil; the price trend (in US dollars) for now continues to be downward for almost all raw materials. As a result, the two-speed economic trend of commodity exporters and importers should continue for now. Any rise in US interest rates still represents a risk factor for stocks, bonds and currencies of many emerging countries, even whether the probability of an upcoming rate hike and the expected size of those possible interest rate hikes have decreased slightly in the recent period.
Focus on emerging countries
China
Economic development in China continues to slow down. After the government and the central bank apparently managed to cool down the real estate sector significantly, more and more investment capital flows into the Chinese stock market and, of course, especially into A-shares accessible to Chinese investors living in the country. After steep price increases in the past months (an increase of around 60% relative to the index since late summer), there now seems to be a certain euphoria among many investors. The number of new brokerage accounts is rising rapidly, as are credit-financed stock purchases. As a result, some sectors within the mainland Chinese market have already reached exorbitant levels of valuations. Along these lines, Chinese tech stocks are meanwhile trading at an astronomical price-to-earnings ratio of over 200; this is even much higher than the extremely high valuations of many Nasdaq technology stocks in the US at the beginning of the new millennium, at the height of the internet bubble. On the other hand, however, this does not apply to the whole market. For example, bank stocks that feature heavily in stock indices are disproportionately priced with low, single-digit price/earnings ratios. Still, the majority of investors clearly do not trust these apparently convenient valuations and above all see the risks of possible write-downs and adjustments of the banks' credit portfolios. Despite the sharp rise in the Shanghai and Shenzen share indices, it would therefore be more than premature to announce already now the end of the resumption of courses. Conversely, the broader market still has significant other potential in terms of prices. However, setbacks are always possible, also due to the evident speculative fever of a part of Chinese investors. Hong Kong-listed H shares, by contrast, posted only a modest gain in March (approx. +1%); in the first days of April, however, they began to rise sharply again.
India
Indian industrial production continues to expand moderately, especially the production of capital goods, while the production of consumer goods is declining. Inflation rates paused briefly in their downward trend, but their decline should continue in the coming months; unless there is an unexpected rise in oil prices. The central bank once again cut key rates by 0,25%, which was quite unexpected for some market participants, as there was actually no regular central bank session in March. The trend in inflation and the budgetary measures introduced have evidently convinced the central bank that another cut in interest rates could be justified. Any further rate cuts should depend on inflation, the monsoon pattern still so important for India and the global environment. Indian stock markets consolidated in line with the global trend and posted a slight loss. The market, without a doubt, is no longer to be considered cheap; in the coming months, however, it could still benefit from the support coming from domestic politics and the economy.
Brazil
Brazil's economic prospects continue to deteriorate. To the surprise of analysts, jobs were cut for the third consecutive month in February, instead of creating new jobs as expected. In January, the economy also seems to have slowed further. Growth estimates for the Brazilian economy have consequently been further scaled down; in general, a drop in the economy of almost 2015% is expected for 0,8. This weak economic performance should almost certainly cause the central bank to postpone any further interest rate hikes for as long as possible, despite still stubbornly high inflation. At the level of domestic politics, just a few months after her re-election, President Rousseff is under increasing pressure. Considering the deteriorating economic situation, cases of corruption and failed reforms, opposition demonstrations are increasingly crowded. In February, the Bovespa stock index rose sharply despite this very negative context and in March, on the whole, was almost unchanged. Brazilian equities, meanwhile, are among the relatively cheaper emerging market markets. A long-lasting rise in prices will probably only occur when the currency and the economic situation have visibly stabilized.
Russia
For the time being, the second Minsk agreement appears to last much longer than the first agreement of late summer 2014. The truce is still essentially holding, even if not entirely. As regards the other political points of the agreement, for now the Ukrainian government, on the other hand, is unwilling to implement them. The extension for another three months of the discount on the price of gas practiced by Russia to Ukraine was undoubtedly a positive political signal from Moscow. Finally, there is no reasonable alternative for a peaceful solution to the crisis. However, the risk of a “frozen conflict” for years should not be underestimated. Russian bonds recovered well in March despite a slight decline in oil prices. Economic data document the difficult economic environment, especially as the West is still unwilling to ease the sanctions imposed. Leading indicators have recently signaled a slight improvement, but the underlying trend is still negative. Economic growth estimates are currently very divergent. In 2015, the Russian economy is expected to slow down from 1% to almost 7%. After the strong recovery of the previous weeks, the Russian stock market has consolidated. In local currency it lost about 8%, in US dollars, on the other hand, just under 2%. A further effective recovery that lasts over time is hardly foreseeable until the economic situation, the oil price and the currency are stabilized in a lasting way and as long as the tough confrontation between the West and Russia continues.
Turkey
The parliamentary elections in June are getting closer and, as a result, domestic political topics increasingly dominate the news on Turkish financial markets. President Erdogan would like to have the constitution changed after the parliamentary elections to massively expand his powers as president. However, the necessary 2/3 parliamentary majority for the AKP does not seem to be secure yet. Furthermore, the long and complicated peace process with the Kurds risks a setback. This in turn could, however, lead to an electoral alliance of Kurdish parties and politicians, which would increase their chances of passing the high minimum threshold of 10% of the vote. In this case, the majority of the 2/3 persecuted by the AKP could be endangered. From this point of view, the market will probably still be heavily influenced by political news in the coming months. In the meantime, the economic trend seems to be slowing down further. The trade deficit is narrowing, which in itself is good. However, this is due in particular to the fact that imports (above all oil and energy sources) are declining more than exports. A slight increase in exports to the EU cannot compensate for non-existent or declining demand in Turkey's other major export markets adversely affected by oil prices or geopolitics, such as Russia, Iraq or the United Arab Emirates. The Turkish lira was among the weakest currencies in the region in March, bond yields were, overall, slightly higher on a monthly basis. The stock market also continued to drop slightly; prices decreased by about 4%.
Greece
The main controversial issues between the government in Athens and its creditors (the „troika“ made up of EU, ECB, IMF) are still unresolved. Finally, it is impossible for the newly elected Syriza government to fulfill its key election promises and at the same time meet the demands of the EU, the ECB and the IMF. The latter clearly point to the strength of the facts: the more time that passes without an agreement, the more precarious and unbearable Greece's financial situation becomes, which becomes increasingly weak, thus also weakening its negotiating position. The negotiating climate is far from good; this is not surprising considering a fundamental, political-ideological confrontation, in which personal arguments also converge in the meantime. The risk of a voluntary or even better non-voluntary exit of Greece from the Eurozone (“Grexit” or “Greccident”) has therefore considerably increased. While the immediate economic impacts on the euro area should be calculable, the long-term negative political effects are far more difficult to assess. For Greece itself such a scenario would naturally be much more serious, at least in the short and medium term, and this is not at all the intention of the government in Athens. Due to the once again worsening prospects of reaching an agreement, the Greek stock market dropped significantly. The very steep swings should continue for now, and Greek government bonds are pricing in more than ever the substantial odds of a deal breakdown or another debt cut and/or eurozone exit.
Poland
In Poland, as in the entire central European region, the economic trend is currently positive. In this sense, the positive data of the last period coming from Germany should give support in particular. The manufacturing index is still clearly above 50 points and therefore signals an expansion of the industry. At -1,6%, however, the inflation rate is still clearly in deflationary territory. The central bank's interest rate cut in early March therefore came as no surprise; however, with 0,50%, it exceeded all expectations and now stands at 1,50%. At the same time, the central bank signaled the end of the interest rate cutting cycle; indeed there have already been similar declarations at other times in the past. Nonetheless, bond yields rose slightly in March; the zloty, on the other hand, rallied strongly and profited from better sentiment than central Europe. The Warsaw stock market has hardly changed lately.
Czech Republic
The Czech Republic continues to benefit from stable export orders, industrial production is currently booming and overall retail trade is also still showing a positive trend. In 2015, the economy could grow by around 2,4%, after around 2% last year. Meanwhile, a slight deflation seems to have arrived in the Czech Republic as well. In politics, the desire for EU membership is growing more and more, drawing attention above all to the already very close link in economic terms with the euro area. At the same time, however, the central bank is looking for ways to end the de facto peg of the krone to the euro (through a “minimum exchange rate”), without however risking a market reaction as strong as that of its Swiss colleagues to January. The Czech koruna reacted with slight losses, while Czech bonds followed the positive trend of eurozone government bonds. The Prague stock market lost about 2,5%.
Hungary
Similar trends are seen in Hungary as in Poland: robust foreign demand accompanied by negative inflation. Economic growth in the last quarter of 2014 surprised significantly on the upside and the current dynamics are also positive. Hungary's central bank cut its key rate to a new record low of 1,95%. Despite this, the forint rose sharply, similar to the zloty. In contrast, Hungarian bond yields were slightly higher on a monthly basis. The stock market again rallied significantly and with up 8% was by far the best in the region. As in February, the announcement of the reduction of the bank tax had a positive impact on financial stocks, among others on the listing giant OTP (+20%).
