BRICs

Hong Kong & China

Hong Kong and China stock markets extended losses for another week when the intensified European debt woes and the falling foreign investment in China overshadowed the required reserve ratios (RRR) cut announcement.

In China, the People's Bank of China cut the RRR by 50 basis points, effective May 18. However, market response towards the third cut in six months was muted as talks on a coalition government and the eventual failure in Greece overwhelmed the market.

Foreign direct investment (FDI) has declined for six months with April figure coming in at 0.7 percent year on year, of which FDI from the European Union in the first four months of 2012 slumped 27.9 percent year on year.

Elsewhere, the falling home prices in April added to signs of economic slowdown. The sales prices of newly constructed residential buildings declined in 43 cities out of 70 medium and large-sized cities on a monthly basis. Together with discouraging trade and production data, expectation of further loosening policy rose.

India

The Indian equity market trended lower this week as the worsening concerns over the Europe debt crisis has negatively affected the Asia markets.

Investors' risk appetite decreased and moved investments from emerging markets to U.S. dollar, which is perceived to be a safe harbor. India's rupee, as a result, fell to a record low. The local currency headed for the biggest weekly drop in almost six months after Greece's credit rating was cut by Fitch Ratings yesterday amid concern the country will leave the euro.

The Reserve Bank of India is closely monitoring the rupee's movements, and we believe the RBI could initiate more policy steps to control further depreciation of the currency. Last week, the Reserve Bank of India cut the amount of overseas income companies can hold in foreign currency to 50 percent from 100 percent, forcing them to convert earnings.

Brazil

The equity market sell-off intensified in the week ending May 17th, the Ibovespa falling 9.5 percent in local currency terms to erase year-to-date gains.

Brazilian output data last week reinforced the dual speed dynamic within the local economy, with retail sales rising 12.5 percent year on year in March, whilst the GDP proxy (IBC-Br) missed expectations falling 0.35 percent month on month, pulled lower by the weakening industrial sector. The IBC-Br posted year-on-year growth of only 0.91 percent, against expectations of a 2.40 percent rise, paving the way for further monetary easing in the near term.

Brazilian home builders hit new lows on the back of sequential earnings misses in the first quarter. Confidence in the sector’s ability to generate cash and sustain returns has been eroded with all large-cap developers missing expectations in the quarter.

Petrobras partially reversed significant recent underperformance after reporting the better-than-expected first quarter results, with downstream losses below expectations. The government continues to resist calls for a fuel price hike, with Petrobras upstream earnings consequently showing little leverage to oil prices.

Brazilian markets will be driven in the short-term by any further changes to bank lending rates and domestic fuel prices. The Central Bank of Brazil’s pre-emptive rate cuts have so far been justified by decelerating activity and inflation data, though this has come at a price, with government influence over both monetary policy and the banking sector rising.

The report is provided by Mirae Asset Global Investments.