Review of Emerging Markets December 2014, with focus on Latin America Highlights of the month  Most emerging markets retreated in December.  Once again, the US dollar rose relative to most other currencies, thanks in part to the Federal Reserve's ending of QE.  Investors fretted about the impact on some countries of the further slide in the price of oil  Highlights included a dramatic interest rate hike in Russia and the surge in prices of some of China's A shares. Economic Data Overview of the IMF's World Economic Outlook projections (percentage change, year over year) 2012 2013 2014 (Prediction) 2015 (Prediction) Output Advanced Economies United States Euro area Japan UK Emerging Market and Developing Economies Central and Eastern Europe Russia Developing Asia China India ASEAN-5(1) Latin America and the Caribbean Brazil Mexico Middle East and North Africa(2) Sub-Saharan Africa South Africa World Trade Volume (goods and services) 1.2 2.3 -0.7 1.5 0.3 5.1 1.4 3.4 6.7 7.7 4.7 6.2 2.9 1.0 4.0 4.8 4.4 2.5 1.4 2.2 -0.4 1.5 1.7 4.7 2.8 1.3 6.6 7.7 5.0 5.2 2.7 2.5 1.1 2.5 5.1 1.9 1.8 2.2 0.8 0.9 3.2 4.4 2.7 0.2 6.5 7.4 5.6 4.7 1.3 0.3 2.4 2.7 5.1 1.4 2.3 3.1 1.3 0.8 2.7 5.0 2.9 0.5 6.6 7.1 6.4 5.4 2.2 1.4 3.5 3.9 5.8 2.3 1.4 5.3 2.4 4.4 3.7 4.4 3.6 3.9 4.3 6.1 4.5 5.8 Imports: Advanced Economies Imports: Emerging Market and Developing Economies Exports: Advanced Economies Exports: Emerging Market and Developing Economies 1.2 6.0 2.0 4.6 (1) Indonesia, Malaysia, Vietnam, Thailand, Philippines (2) includes Pakistan, Afghanistan Source: Overview of the IMF's World Economic Outlook projections, World Economic Outlook Update, October 2014, p2. Market Data Stock Market Indices (US$) MSCI Emerging Markets MSCI Eastern Europe MSCI Russia MSCI Arabian Markets ex Saudi Arabia MSCI Latin America MSCI Brazil MSCI Asia MSCI China MSCI India 31 Dec 2014 956.31 1 Month -4.82% 12 Months ▼ -4.63% 120.12 -18.85% ▼ 404.92 -23.95% 647.10 2 Years 3 Years 4 Years 5 Years -4.80% 1.43% -4.53% -0.68% -40.01% -23.66% -12.94% -15.66% -10.47% ▼ -48.54% -29.19% -18.09% -18.81% -12.63% -8.03% ▼ 5.57% 11.19% 8.72% -0.48% 3.25% 2,727.69 -9.33% ▼ -14.78% -15.25% -8.85% -12.31% -7.90% 1,832.34 -11.37% ▼ -17.39% -18.04% -13.45% -16.46% -12.75% 457.48 -2.12% ▼ 2.48% 1.12% 6.50% -0.58% 2.64% 66.04 1.15%  4.65% 2.50% 7.72% -0.10% 0.38% 496.39 -5.98% ▼ 21.87% 7.44% 12.68% -2.94% 1.16% Sources: Bloomberg/ MSCI/Barra, as at 31 December 2014 Past performance is not a guide to future performance. Global emerging markets in December 2014 In December, the MSCI World Index fell by 1.71% in US dollar terms. The MSCI Emerging Markets Index slipped by 4.82%. In both cases, the results were compressed by the continuing strength of the US dollar. As had been the case in previous months, some investors were concerned that the ending of Quantitative Easing (QE) by the US Federal Reserve would significantly reduce the amount of funds that are available to the emerging markets. Sentiment in relation to a number of countries was also affected by the further slide in the price of oil. At the end of December, the benchmark prices for Brent and West Texas Intermediate stood at around US$56/barrel and US$53/barrel respectively. Concerns were greatest in relation to Russia, where the rouble fell from US$1:Rb50.32 to US$1:Rb58.57 over the course of December. This was despite the decision of Russia's central bank to lift its key policy rate by 650 basis points, from 10.50% to 17.00% at midnight on Monday 15 December. The central bank was concerned by the slippage of the currency and rising domestic inflation. Commentators were concerned by the overreliance of the government on revenues from the energy sector and by the scale of the foreign currency borrowings of some of the leading companies. Qatar and the United Arab Emirates (UAE) were also seen as economies where growth is likely to slow as a result of lower energy prices. Meanwhile, there are signs that activity in some Central and Eastern European countries is holding up - in spite of the widely documented softness of economies in much of the European Union (EU). For instance, HSBC said that its purchasing manager's index (PMI) for the manufacturing sector of the Czech Republic slipped from 55.6 in November to a 17-month low of 53.3 in December. Given that any level above 50 points to growth, the latest result indicates a 'robust' expansion, supported by rises in new orders, exports and employment. In Poland, the PMI for the manufacturing sector retreated from 53.2 in November to 52.8, which is still the second-highest reading since March 2014. China's stock market was an exception in that A shares listed on the markets of Shanghai and Shenzhen rose very strongly, led by financial companies. This was partly the result of unexpected decision of the People's Bank of China to cut its key rates in late November and partly due to other official measures to improve access to funds by small and medium-sized enterprises (SMEs). MSCI's China Index rose by 1.15% in US dollar terms during December. Region in focus: Latin America December was a challenging month for investors in the emerging markets of Latin America. Most of the regional currencies slipped relative to the US dollar as investors focused on the continuing fall in the prices of oil and other commodities, and the possible implications of the end of QE by the US Federal Reserve. Share prices also fell in local currency terms. A highlight of the month was the decision on 3 December by the monetary policy committee (Copom) of Brazil's central bank to increase its key policy rate by 50 basis points to 11.75%, as a part of official efforts to contain inflation. Most analysts had been looking for an increase of 25 basis points. However, the latest economic news flow from Brazil, as from most countries in the region, has been far from disastrous. On 2 January 2015 HSBC reported that its PMI for that country's manufacturing sector had risen from 48.7 in November to 50.2 in December. The latest result points to a marginal expansion in activity for the first time since August. Manufacturers' total order books grew for the first time in nine months. Orders from foreign customers increased for the first time in three months. Manufacturers hired new workers for the first time since July. Although input costs have been boosted by the recent weakness of the real vis-à-vis the US dollar, there has been little impact on overall inflation. In her inauguration speech, also on 2 January, re-elected President Dilma Rousseff confirmed that her administration is committed to fiscal discipline and promotion of economic growth. The newly appointed Finance Minister Joaquim Levy has said that the government will seek to achieve a primary (i.e. before interest payments) of 1.2% of GDP in 2015. Meanwhile, there are signs that Mexico's economy is gaining momentum, thanks in part to the general strength of activity in the USA. HSBC's PMI for the manufacturing sector advanced from 54.3 in November to a two-year high of 55.3 in December. Both output and new orders increased, while export sales grew at the fastest rate since July. The central bank announced on 1 January 2015 that the new sovereign wealth fund, which had been created as a part of the energy reforms in Mexico, had begun operation. Named the FMP, the Mexican Petroleum Fund for Stabilisation and Development, the new sovereign wealth fund will receive, manage and distribute the government's revenues from the energy sector. The FMP will channel surplus funds to long-term investment projects as do similar sovereign wealth funds in other countries. The FMP will formally report on its activities quarterly. For its part, Chile's central bank highlighted the 'low dynamism' of the economy. Annual inflation and core inflation are above 5% and 4% respectively. However, inflation expectations are around 3%, which is the central bank's long-term target. The central bank kept its key policy rate unchanged at 3% at its meeting on 11 December. By contrast, the central bank of Colombia, which maintained its key rate at 4.5%, noted that the economy is operating at close to full capacity, thanks to robust domestic demand. Although the central bank concedes that the fall in the price of oil (and the rises in the prices of some foods that are imported by Colombia) will have had an adverse impact on the economy, the central bank is still considers that GDP growth of 5.0% is the 'most probable' outcome for 2014 as a whole. Looking forward, we continue to monitor the development of financial services in Latin America, a region where many households and businesses are still under-geared. The growing numbers of middle class households should also be positive for a number of companies, including producers/distributors of branded consumer products and telecommunications groups. In spite of the current softness in activity in many of the region's economies, there may be substantial new investment in infrastructure. 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All data has various sources which can be provided upon request and is at 31 December 2014. Complied: 7 January 2015. Reference number: M01/02C