▶ Signs of a global upturn, with little help from Europe and America.
By VIKAS BAJAJ and KEITH BRADSHER
MUMBAI, India
IF INVESTORS IN New York and London are seeing the first delicate signs of a recovery, their counterparts in developing countries say they are witnessing a full-on rebound.
After a crushing fall in the last year and a half, stock markets in developing countries are riding a wave of optimism that the recovery of the global economy is at hand and being led by the developing world, especially China. Though emerging markets remain far below the highs they attained more than a year ago, investors are again viewing their chances of growth as better than those of the United States or Europe.
As a result, the Indian Nifty stock index has jumped over 60 percent in the last three months. China’s CSI 300 index of shares in Shanghai and Shenzhen and Brazil’s Bovespa have each increased around 35 percent over the same period. By comparison, the Standard & Poor’s 500’s gain of about 25 percent looks modest.
“There was a stampede for the exits in the fourth quarter, said Gonzalo S. Pangaro, portfolio manager of the T. Rowe Price Emerging Markets Stock Fund. “The market is starting to realize that although these markets face issues, they are manageable issues.
So much so that analysts have attributed some of the recent gains in the S.& P. to investors’ belief that the Chinese economy is improving.
But it is not just China that is generating optimism. While industrial production has rebounded in China, so have car sales in India and retail sales in Brazil. Could all this be irrational exuberance? Current valuations are extremely rich: the price of stocks on the Indian Nifty and the Bovespa are about 20 times earnings. Prices are about 29 times earnings on the CSI 300. (Analysts are guided by the axiom that a stock selling for about fifteen times earnings is fairly priced.)
The optimistic view is that these high price-to-earnings ratios reflect the return of an appetite for risk in the markets, which normally accompanies a more positive outlook, and a belief that these countries are ready to resume strong economic growth.
The skeptical outlook is that the economies would have to leap to double- digit growth rates to justify these valuations and that that could only mean a bubble was forming.
Emerging markets swing more wildly than developed countries do. Each of the big developing economies, the socalled BRIC countries, Brazil, Russia, India and China, face weaknesses that could stunt a recovery.
Exports and foreign investment flows, which are critical for many developing countries, remain anemic. Government spending has taken up some of the slack, but rising fiscal deficits in places like India could limit how much more policy makers can do to stimulate their economies.
For now, there is little talk of caution. In India, the rising stock market surged even more when the government garnered a bigger majority in national elections last month.
Madhabi Puri-Buch, the chief executive of Icici Securities, in Mumbai, said India would weather the crisis better than other countries because domestic consumption was still growing. Sales for the biggest Indian automaker, Maruti Suzuki, climbed more than 10 percent in May.
Ms. Buch said companies were raising billions of dollars from institutional investors. “Most companies in their boardrooms would be saying we need to plan for future growth,” she said, “rather than saying we need to batten down the hatches for a long winter.”
Other analysts say the fundamentals of the Indian economy have not improved enough to justify the big rally.
In China, industrial production has started to recover, and imports of commodities have risen. But the rebound is concentrated in domestic sectors that benefit from the stimulus program. Exports are still struggling.
An increase in bank lending has prompted a revival of the real estate market and the car market. The government has also offered $1.02 billion worth of subsidies to people in rural areas for car and home appliance purchases, contributing to a 14 percent increase in overall car sales in the first four months of this year, compared with the period last year.
“We expect manufacturing activity will continue to expand in the coming months, supported by the roll-out of the government’s stimulus,” said Jing Ulrich, the managing director of China equities at JPMorgan Chase.
Emerging markets in East Asia are also showing signs of recovering from a steep slowdown in manufactured exports. The Taiwanese economy, for instance, shrank 10.2 percent in the first quarter compared with the period a year ago, but closer relations with mainland China have improved investors’ confidence.
Indonesia has been insulated from the global downturn by its large domestic market and limited reliance on exports, and is benefiting from improving overseas demand for its natural resources.
In Brazil, which has been hurt by the steep drop in commodity prices, industrial production has risen every month since January, though it is much lower than the corresponding period last year. Many independent analysts say Brazil will be lucky to avoid a contraction. Nonetheless, the Brazilian stock market has risen smartly.
“We never thought it would get back to this level so quickly,” said Alessandra Ribeiro, an economist at Tendencias, a consulting group. “When there was panic, investors fled to the U.S. to buy Treasury bonds and now they are diversifying again. Brazil is clearly one of those that have been chosen.”
Stocks may be overvalued again. India’s market surged on May 18.
Vikas Bajaj reported from Mumbai and Keith Bradsher from Dongguan, China. Andrew Downie contributed reporting from Sao Paulo, Brazil.
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