Global Emerging Markets Strategy - Emerging Markets and the Japanese Earthquake - Citigroup

 Sympathies — We wish to express our deepest sympathy to the Japanese people and the country following the recent tragic earthquake and tsunami.

 EMs Outperforming Again — Quietly, emerging markets have begun to outperform again; peak underperformance of 12%+ since early-October is down to 8%. This relative EM comeback has been due to a sell-off in DM, rather than a rally in EM.

 In Japan — Our economists expect Japanese GDP to grow by 2.1% in 2011, as the initial damage is followed by reconstruction activity. The yen’s upside should be far less than the 20% rise after the Kobe earthquake in January 1995. After a 3-day 17.6% drop in the TOPIX, most of the fall may already have occurred.

 Comparative Sizes — Since the Kobe earthquake, Japan’s weight in global GDP has fallen from 17.7% to 8.7%, while that of the four BRICs has risen from 7.3% to 17.2%. Japan’s weight in global equity markets has fallen from nearly 30% to less than 9% over the same period, while that of GEMs has risen from 7% to 13.6%.

 Japan and Emerging Markets — i) any slowdown in growth in Japan and beyond may temper the rise in EM inflation and rates; ii) we see little re-patriation of yen funds from EM; iii) the most exposed EMs to slower growth in Japan (Exports to Japan/Exports) are South Asia, Chile, China, South Africa, Taiwan, Korea, Peru.

 Ask the Research Teams — We provide a summary of research written by our stock analysts and strategists across the emerging markets over the past week.

 First MENA, Now Japan — Equities have been hit by Middle Eastern turmoil (and higher oil prices) and now the Japanese earthquake; the bigger risk for the future is likely to be a further spike in oil prices. Overall, however, if these events leave the global economic recovery intact, as we expect, investors should look to buy.