India has emerged as one of the lucrative investments in the region. How is the rest of the world faring?
CHINA’s stock markets have seen much turbulence over the past few months. On June 26, the country’s main stock exchange fell more than 7%. The central bank responded by cutting the interest rate the next day to shore up the economy. On July 9, the stock markets rebounded following a series of market-propping government measures — only for the Shanghai Composite index to plunge 8.5% in a single day on July 27.
On Aug 11, the Chinese government devalued its currency further, sparking market concern of slowing economic growth. The move ignited reactions in other major stock markets in the US, Europe and Japan.
The currencies of emerging markets also fell.
Commenting on the devaluation of the yuan, Leon Goldfeld, deputy chief investment officer for equities (Asia ex-Japan) at Amundi Hong Kong Ltd says the currency is not far from its reasonable value. “I think the exchange rate now is not too far from what is a reasonable [market] value. But because the Chinese economy is weakening, [the currency] will continue to decline over the next 6 to 12 months, although it won’t depreciate too much.”
Looking at the key economic indicators coming out of China, particularly electricity consumption, freight movements, bank credit and finance creation, Goldfeld predicts that the economy will slow down to an annual growth rate of 6.5% at the end of the year.
“Like China, other emerging markets are also struggling. Their currencies have adjusted for that, but it is a natural adjustment based on market forces. It is not like their central banks are deliberately trying to devalue the currency to a certain point to help the economy,” he says.
As for whether China will devalue its currency further and spark a currency war, Goldfeld says this scenario is unlikely. “I don’t think they are going to deliberately, aggressively manipulate the currencies because there is no long-term benefits from that. There will be weakness, but there won’t be competitive relative devaluation.
“Central banks in emerging market don’t want to see sharp movements in their currencies and will try to stomach market the volatility. They will manage the process and dampen it. But they won’t try to target specific points.”
Global growth to slow down
Goldfeld sees the China economy slowdown as the biggest downside to global economic growth, and that this has weighed down the performance of equities in emerging markets.
The sluggish global growth has translated into fewer trades and, more importantly, lower commodity prices. Oil prices tumbled to less than US$50 a barrel in August while nickel and aluminium prices fell to six-year lows. The prices of other commodities, such as iron and copper, have also been suppressed.
Goldfeld says the 3.3% global growth this year projected by the International Monetary Fund is not a challenging target to achieve despite the risk of a China slowdown. “The Chinese economy is slowing and it has a flowing effect on other parts of the world. One major thing that has impacted the world is the commodity demand. I think this is a downside to global growth.”
He also foresees the sluggish growth in emerging markets continuing for the next few years. “For the region’s growth to rebound, it needs to have stabilisation factors as well as an improvement in global growth. It is unclear when there will be an upward cycle again. Maybe in the next two to three years.”
According to data from Lipper Research, Asia ex-Japan witnessed fund outflows of US$197 billion in the first half of this year — equivalent to four times the fund outflows of US$47.6 billion last year. It was also the only region to see net outflows in the first six months of the year. Lipper Research says one of the major factors is the anticipation of China’s equity market movements and policy actions.
The US Federal Reserve’s imminent interest rate hike is another market-moving event to keep an eye on as this is another major factor that will weigh on emerging markets. Last Friday, it maintained the current interest rate.
Goldfeld says any rate hike is likely to happen in the fourth quarter of this year, unless the US financial markets are disrupted by other global events.
“The chance is pretty high, maybe 80% to 90%. This is based on the reality that the US economy is growing by having a nominal GDP of around 4%. And if you have this, normally interest rates are not going to be zero; it is going to be higher,” he adds.
“The combination of a rising US dollar (due to the anticipation of the Fed’s interest rate hike) and sluggish global growth is not a good combination for emerging markets.”
However, investors who are already invested in emerging markets must remember that “this is not a surprise to anybody”. Goldfeld is not bullish on these markets, but recommends that investors hold on if they are already invested.
“No one is bullish on emerging markets. The environment is not very good and this is reflected in the prices. We don’t think [emerging market equities] are going to fall further. In the short term, [the price of stocks in] emerging markets are not going to jump because many are not going to buy until the fundamentals have improved,” he says.
“If investors are planning to sell because they [foresee] things are going to get worse next year, you should probably not. [The current prices] are probably already within market expectations.”
As for whether this is reflective of emerging markets having found the bottom, Goldfeld says he doesn’t see this happening yet. “For us, we are not ready to buy the [stocks] yet. Things are not too negative for us to sell [just yet].”
This article first appeared in Money + Wealth, digitaledge Weekly, on September 21 - 27, 2015. Click here to subscribe from RM30 for the digitaledge Weekly and digitaledge Daily.