Emerging markets: it all depends on China

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Please note that this article may contain technical language. For this reason, it is not recommended to readers without professional investment experience.

Did you know that the technology sector now represents 25.6% of the MSCI emerging market equity index (relative to 23.2% for the MSCI USA index at the end May 2017)

The Chinese economy was stabilised with another dose of monetary and fiscal easing in 2016, but the imbalances – credit growth that is too strong and opaque, inefficient state-owned enterprises and a bubbly housing market – have barely been addressed. Thus, our structural worries about China remain. We think that economic growth in China is still structurally on a slowing trend (see Exhibit 1 below).

Most recently the authorities have applied some targeted monetary tightening, directed in particular at the more shadowy part of the financial system. As a result, credit growth has slowed substantially as have some leading and real economic indicators.

We think economic stability is paramount for the Chinese leaders, with an important Plenum of the Communist Party coming up this autumn. So any slowdown should be shallow, although it will have an impact on countries exporting to China, such as other Asian countries, but also Germany and possibly even the US.

Part of the reflation narrative was built on Chinese producer prices. After years of deflation, Chinese producer prices have surged this year. This is strongly driven by commodity prices, but not those alone. So, better price developments have been positive for Chinese companies, but also for other exporters in Asia.

Exhibit 1: China: GDP and manufacturing PMI is slowing down

Source: Bloomberg, BNP Paribas Asset Management, as of 06/07/2017

Global trade has shown a synchronised upswing, which is generally beneficial for emerging economies. It remains to be seen how durable it is, as it is partly driven by commodities and the technology cycle, but for now emerging economies seem to be in bit of a sweet spot, with exports improving and domestic inflation generally low. A number of central banks, most notably Brazil’s and Russia’s, should thus be able to cut rates further. Another positive is that emerging market currencies are generally undervalued.

Exhibit 2: Recovery of the world trade volume

Source: CPB World Trade Monitor, BNP Paribas Asset Management, as of 06/07/2017

Exhibit 3: OECD leading indicators

Source: Datastream, BNP Paribas Asset Management, as of 06/07/2017

It is noteworthy that another political scandal in Brazil involving the reform-minded president Temer caused a strong sell-off in Brazilian equities and the currency, but without much contagion to other emerging markets. While the latest developments in the financial scandal that is shaking Brazil could delay reforms, the virtuous cycle of self-sustaining growth, a stable real and central bank credibility appears to be firmly in place.


Written on 06/07/2017

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay.

Investing in emerging markets, or specialized or restricted sectors is likely to be subject to a higher than average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity, or due to greater sensitivity to changes in market conditions (social, political and economic conditions).

Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

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