Many institutional investors believe that emerging markets have the worst of both worlds. The US economy – especially the flexible labor market – is so strong that the Fed is forced to hold interest rates steady At high levels It may require additional tightening. This has led to higher yields on US Treasuries, contributing to the sharp rise in the value of the US dollar and putting emerging market assets under pressure.
Developing economies also have to deal with it Loss of confidence The Chinese economy is witnessing a sharp slowdown in growth and growing concerns about Beijing’s reluctance to take strict financial stimulus measures to stop the rot in the real estate sector. Because China represents about 30% of the benchmark MSCI emerging market equity index, and developing economies – especially commodity exporters – are most exposed to a slowdown in China, the spillover effects are large.
For an indication of how much uncertainty over US monetary policy and China is impacting sentiment, just look at the results of Bank of America’s latest global fund managers survey, published on Tuesday. Participants noted that high inflation keeping leading central banks on their hawkish stance is the biggest “tail risk” in markets, highlighting a lack of conviction among investors about monetary policy. Timing of interest rate cuts Despite signs that the US economy is slowing.
Moreover, participants’ expectations for growth in China fell to their lowest level since widespread lockdowns were imposed last year.
It is also worrying, Real estate sector in China It has replaced US real estate – particularly the vulnerable office market – as the most likely source of a “systemic credit event.”
However, if concerns about a hawkish Fed and a sharp contraction in China have caused developing economies to lose favor with investors, why would an exchange-traded fund track an index of emerging market stocks that excludes China by 8.2 percent this year?
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Boom, bust and borrowing: Has China’s housing market declined?
Boom, bust and borrowing: Has China’s housing market declined?
According to a report published by Goldman Sachs on August 21, part of the reason may be due to the indirect effects of the Corona virus. Downward revisions to forecasts For Chinese economic growth and Corporate profits It has diminished. This indicates that “there is a slow divorce happening between China and the rest of the world [emerging markets’] Growth prospects.”
This is debatable, especially given the intensity of the sell-off in emerging markets since early August. Although concerns about the Fed’s hawkish stance are largely to blame, China’s real estate-driven decline is clearly a factor.
However, it is not just about the Fed and China. The Nifty 50 index, one of the key gauges of Indian stocks, has risen more than 18 per cent since mid-March. According to high-frequency data on fund flows from JP Morgan, Foreign investors It has bought nearly US$16.5 billion worth of Indian stocks this year.
While there are concerns about the high valuations of Indian stocks – which have a 15 per cent weighting in the benchmark MSCI emerging markets index – they still benefit from the fast-growing economy, strong corporate earnings and, most importantly, India’s appeal as an alternative. To China.
South Korean companies increasingly see India as a viable alternative to China
South Korea is another market that outperformed the broader index. Although the global semiconductor industry is in the midst of a downturn, hype around generative AI has lifted sentiment toward South Korea’s technology-heavy stock market, which has risen more than 13 percent this year. Goldman Sachs believes Korean stocks will continue to outperform, especially if the United States enjoys a soft economic downturn.
Mexico already benefits from strong trade ties with the US economy. Earlier this year, it replaced China as the United States’ largest trading partner as Washington seeks to reduce supply chain dependence on geopolitical rivals and source imports closer to home. The rise of “close to shore” policy has pushed Mexico in this direction Geopolitical sweet spotSupported by the government’s prudent fiscal and monetary policies.
Moreover, many emerging market central banks have been at the forefront, raising interest rates long before the Fed began tightening policy aggressively. With inflation now falling more sharply compared to advanced economies, this has created space for interest rates to be cut.
Several major emerging markets, including Brazil and Poland, have already reduced borrowing costs. More are expected to follow suit in the next few quarters. by Leading the cycle of lowering global interest ratesDeveloping economies will be better placed to deal with slower growth, provided they are financially stable enough to lower interest rates.
A sign on the National Bank of Poland building in Warsaw on September 7 reads: “Thanks to the National Bank of Poland, Poland is on a good path, prices have not changed for almost five months!” The sign also shows the monthly price increase from April to August. The bank’s president, Adam Glapinski, said the bank’s big interest rate cut this week was justified because prices are stabilizing and the era of high inflation is over. Photo: AP
Emerging markets still face a lot of headwinds. Oil prices are rising again, reaching their highest levels in 10 months. This fuels inflationary pressures and hurts net energy importers Like India.
Moreover, feelings remain grim. Even if we exclude the decline in Chinese stocks and the rise in US stocks, the performance of emerging market stocks is still weak compared to their counterparts in advanced economies.
However, there are reasons for cautious optimism. Not only are emerging market stocks trading at a 31 per cent discount to developed market stocks, but global investors remain “significantly under-positioned” in developing economies, according to JP Morgan. If the Chinese economy stabilizes or if the Fed makes clear that it is done raising interest rates, emerging markets could recover.
Although the risks are many, and although it has been two decades since developing economies enjoyed a multi-year bull market, it is not all doom and gloom.
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