The fourth quarter continued the strong momentum for emerging market equities with a gain of 4.4%, following yet another strong quarter from Russian equities with a gain of 9%. A-shares in China finished the year strongly as well, with a gain of 7%. For the full year, we had a stellar performer in Russia that gained 24% where the stock market index posted a flat year. Hats off for outstanding stock picking, the best relative and absolute year we have seen in many years among all the managers we cover.
The Russian economy, despite international sanctions, is doing well. In fact, the sanctions have helped promote a Russian made theme that benefits more and more segments of the economy, so long term it may be the best that could have ever happened to Russia. Commodity prices have improved during the year where the crucial price of oil gained $10 per barrel for the full year. Inflation fell to post-Soviet low, at an estimated 2.5%. This is a positive sign for the Russian economy as low inflation gives the room for monetary easing which in turn should make credits more accessible for local businesses. In 2017 the Russian Central Bank decreased its key rate 6x from 10% to 7.75%. Russia also has a very small debt burden at approximately 10% of GDP.
2017 was a great year for India. The steady focused prime minister, Mr Modi, and his BJP party hold a strong grip on the political agenda. The key event during the year was the continued fight on anti-corruption as seen from the demonetization campaign he ran and his pro-reform agenda as seen from the goods and service tax (GST) implementation. Government banks were recapitalized too. The reward of all these events came from India’s first Moody’s upgrade (Baa2) in 14 years as the rating agency awarded the sovereign upgrade due to a raft of policy changes. GDP growth is coming in at well over 6%, only beaten by a few peers such as Turkey and China.
China, the second largest economy in the world, produced an impressive GDP growth of 6.9% for 2017. Low consumer-price inflation at 1.7%, savings of $3.5 tn and new-loan growth of over 13% all helped create a stellar year for domestic Chinese equities. During the quarter, the 19th Party Congress took place and overall it was good news for investors. The future growth drivers for the Chinese economy will no longer be investments like infrastructure and real estate in the past decades such as technological innovations, as well as manufacturing and consumption upgrades by a more affluent population. China is and will remain a key global growth economy. The estimated price/earnings ratio for the Shanghai Composite Index is 13.4 with earnings growth of over 7%.