Emerging markets surge despite oil price highs

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Asian and emerging equity markets hit new peaks on Wednesday despite oil prices rising to a fresh high above $62 a barrel.

While Wall Street and key European markets drifted lower, Asian and emerging markets continued their recent strong rally driven by rising investment inflows and improving economic conditions.

Japan's Nikkei 225 share index climbed to its highest close in 15 months, crossing the key 12,000 level for the the first time since April 2004 on rising optimism about its economy and corporate earnings.

Elsewhere in Asia, Jakarta, Mumbai and Sydney hit all-time highs while Kuala Lumpur struck 5-year peak. Taipei also scaled a 15-month peak while Hong Kong's Hang Seng index rose through the 15,000 mark earlier this week for the first time in five years.

“Emerging Asian markets are surging, no other way to put it,“ said David Rosenberg, economist at Merrill Lynch.

The Asian performance helped lifted the MSCI Emerging Markets index to a record high yesterday of 619 - up more than 500 per cent from a low of 99 plumbed in early 1998 in the wake of the Asian economic crisis. The index has risen by 13.37 per cent in dollar terms this year compared with a gain of just 2.71 per cent for the overall MSCI World Index.

Eastern European markets also have advanced strongly this year. Budapest has risen 44.9 per cent, Lithuania 41.9 per cent and Prague 22.5 per cent.

Eurozone and US markets have also rallied strongly in recent months. The FTSE Eurofirst 300 Index has hit succesion of fresh three-year highs in the last week while US indices have rebounded from April lows.

John Hatherly, head of global analysis at M&G Asset Management, said there had been a turnaround in investor sentiment since April and May when concerns over a potential “soft patch“ in the world economy triggered a “wobble“ in global markets.

A flow of stronger-than-expected data in the last couple of months has boosted confidence in the US economy. This has in turn benefitted other markets, particularly Europe, which export to the US or have large operations in the country. US equities have also benefited from a stronger-than-expected second-quarter earnings season.

Leigh Harrison, fund manager at Credit Suisse Asset Management, said the rally in world markets had also been supported by rising liquidity levels among investors look for returns.

“Investors are looking at bonds and property and thinking equities are relatively attractive,“ he said. Inflows into emerging markets funds this year have risen sharply. These funds have seen inflows of $6.78bn in the year to date compared with $2.78bn in the whole of 2004, according to Emerging Markets Portfolio Research.

Brad Durham, managing director at EPFR, said the modest revaluation of the renminbi and Malaysia move to unpeg the riggitt had sparked new money inflows into Asian markets.

Henry McVey, strategist at Morgan Stanley, cautioned that bullish sentiment in the US had reached extreme levels.

“The US stockmarket has always headed south when the sentiment poll has been at these levels,“ he said.

Crude oil futures hit a record high on Wednesday, before sliding after an unexpected rise in US crude inventories. US benchmark crude futures, West Texas Intermediate for September delivery, touched a record high of $62.50 a barrel, before sliding in early afternoon New York trade to $61.45 a barrel, down 39 cents on the day. The March WTI contract hit $65.30 a barrel, a record for any WTI contract.

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