Goodbye to a Year We All Want to Forget

It is an understatement that it has not been a good year for the global economy or the global markets. We started the year with a horrible natural disaster in Japan, but the dominating theme throughout the year has been the ongoing euro crisis. The crisis has not only had a significant negative impact on the growth outlook for the global economy, but has also significantly increased risk aversion. This has obviously had significant negative impact on global Emerging Markets – both in terms of the growth outlook and market performance.

So will 2012 be any better? We certainly hope so, but with the euro crisis still unresolved there is no doubt that 2012 is likely to be yet another challenging year. We therefore mostly recommend investors to stay focused on strong fundamentals and attractive valuations. Luckily here there are ample opportunities to be found in this regard in the EM universe.

The Asian economies overall remain strong and so do most Latin American economies. For central and eastern Europe (CEE) the picture is decisively bleaker, but also here we would point to opportunities. The sharp sell-off we have seen in the CEE markets this year means that valuation, especially in the FX markets has become significantly more attractive. Here we would especially highlight the Polish zloty and the Turkish lira in which we expect some recovery in the currencies over the coming 12 months.

So while we hope for better times in 2012 we surely feel more confident in betting on value and good fundamentals and then scaling up risk taking, as things hopefully improve during 2012.

Russian central bank is likely to remain on hold for now

On Friday (23 December) the Central Bank of Russia is expected to announce its rate decision. Russian inflation has been easing, even more quickly than estimated by the Central Bank of Russia. Thus, it appears clear the CBR will achieve its full-year inflation target for the first time, as year-on-year CPI is likely to drop below 7% in December. However, as global uncertainty remains high, we do not expect any rate moves from the CBR in December, but according to our view, Q1 is likely to bring a 25 basis points cut to the repo rate and a similar hike to the deposit rate. A cut in the refinancing rate in December would not be a big surprise, but as the refinancing rate currently has little or no effect on market rates, it would be rather insignificant. We expect a total of a 75bp cut to
the refinancing rate within the next six months, due to easing inflation.