Can China market rebound boost emerging markets sentiments?

  • Business
  • Monday, 10 Sep 2018

EXPECTATIONS of a China market rebound over the next 12 months ignites hopes for improved sentiment in beaten down emerging markets (EMs).

Bursa Malaysia may gain but investors will first be glued to events over the next two months, traditionally some of the worst months for markets.

There’s even a kind of “superstition” that if accidents were to happen, they tend to do so in these two months.

Although buoyed on the newly elected government’s reform theme, Bursa is hit by external issues and uninspiring second quarter results.

Hovering at its long-term average level, some sectors and fundamentally strong stocks on Bursa may still be the focus of local funds, said Danny Wong, CEO, Areca Capital.

For China markets, September may even mark potentially higher foreign inflows as index compiler MSCI starts to double the representation of Chinese stocks in its global benchmarks.

Chinese institutional investors surveyed by JP Morgan Asset Management expect their stockmarkets to rebound while some estimate Chinese shares to rise by 5% to 15% in the next 12 months.

Besides higher inflows, these large investors point to the record share buybacks by listed companies, and rising earnings as well as dividend yields.

This looks like a potentially slow climb upwards again, as the Shanghai Composite Index, the worst performing major exchange globally, is already down 18%.

Much depends on yuan stability and China’s strategies to hold up growth with the huge potential of domestic goods replacing foreign ones.

China is taking action to shore up its currency, the latest measure being the introduction of a counter-cyclical factor in the yuan’s daily fixing.

Nevertheless, the yuan’s real effective exchange rate against its trading partners is near a record high, indicating potential for depreciation.

Yuan stability is vital as weakness in the currency can impact emerging currencies already roiled, among other things, by a strong dollar and protectionism.

With ample reserves and savings, China is in a position to maintain a level of growth, and is expected to adjust monetary and fiscal tools to keep its growth engine on.

But China’s role as stabiliser is becoming more challenging amid the clampdown on debt and trade fights.

The slowdown in its economy, which may face an additional US$267bil in US tariffs, continues with exports for August growing at 9.8%, the slowest pace since March.

China’s manufacturing growth in August slowed to a 14-month low to 50.6 as employers cut more staff, stoking worries on consumption.

China’s first current account deficit in 20 years, of US$28.3bil, on trade, income from abroad and transfer payments, will be monitored for signs of a downward trend.

Assuming there is no trade deal with the United States, Deutsche Bank expects China’s growth at 6.3% next year compared with 6.5% in the second half of this year.

“Despite China’s continued growth that acts as a stabiliser to emerging economies, there are powerful crosswinds that will weigh on sentiment related to EMs,” said Lee Heng Guie, executive director, Socio Economic Research Centre.

A US rate hike is expected for September, given stronger-than-expected revised growth of 4.2% annual rate in the second quarter, and strong August jobs data.

Among EMs, troubles at the Fragile Five – Turkey, South Africa, Brazil, India and Indonesia – have resurfaced as their currencies sank further; the litany of woes continues especially for weaker EMs.

The rand became the worst performing EM currency as South Africa unexpectedly went into recession; the rupiah fell to its worst level since 1998, and the rupee hit a new low against the dollar.

Contagion can spread quickly. South Korean investors, nervous over Turkey’s economic troubles, pulled out a record US$7.8bil in mutual funds dealing in short term debt.

They were betting on yields from deposits at Middle Eastern banks which were exposed to Turkey.

Even stronger emerging economies may be affected due to cross holdings and redemptions.

The contagion now covering so many EMs, may even spread over to developed markets as confidence gets shaken.

Whether there is some good news for EMs following a possible peak of US growth, is to be seen.

“The tail-end of the next 12 months may get wobbly; production indices in the United States may have either peaked or at some point near to the peak,” said Pong Teng Siew, head of research, Inter-Pacific Securities.

US manufacturing last month expanded at the fastest pace in 14 years as the Institute of Supply Management gauge rose to 61.3 from 58.1 in July.

Another indicator being monitored is the flattening US yield curve as spreads narrow between two and 10 year yields, potentially indicating a cooling off in the economy.

Columnist Yap Leng Kuen notes the EM situation may worsen before it improves.

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