Many emerging markets were in recession last year and are only slowly emerging. Tight financial conditions and flat to inverted yield curves will make the recovery slow and fraught with risks. Global growth will be lower as a result.
The debate on EM economies (and equities) is heating up. Initially this week, we had the financial world equivalent of the pillory with the widely reported closing of a high profile US hedge fund’s EM fund due to heavy losses in 2013. Solemn nodding followed by EM naysayers suggesting that this is truly a sign of the death-knell of EM as an asset class. The stakes are being raised elsewhere too with the media pitting seasoned investment professionals on both sides of the fence in recent weeks.
Investors welcomed the vow made last year by the new Chinese government to reform the economy through a clamp-down on shadow banking and excess liquidity as well as to commit to a strategy of re-balancing the economy. Still, it seems difficult for China to break out of its old ways. Data released this week consequently shows FX reserve growth in China surging towards the end of last year.
In this report we discuss the outlook of the Chinese economy across a number of key parameters: re-balancing the economy, the current account/exchange rate and the risks stemming from rapid credit expansion. The central thrust of our argument is that…
Germany remains the proverbial strong man of Europe, but we are skeptical that this is a fitting moniker. Looking at exports, it is now clear that Germany and thus Europe continues to see weakness. The total value of German exports has now clearly rolled over from its peak in mid-2012, which coincides with the share of total exports going to China.
Our leading indicator for China has turned down further which adds to the impression of an overall weak turn in Chinese growth. We would still term the turning point as intact, but all components of our leading indicator recently came in with negative readings.
Chinese reserve accumulation has slowed down rapidly. As a result the growth of foreign ownership in US treasuries (USTs) has fallen. The global liquidity pump of Bretton Woods II, in which pegging emerging markets are recycling their increase in foreign exchange reserves into US treasuries in order to keep their currencies stable against the USD, has slowed, but not stopped altogether.
One of the world’s biggest commodity producers, BHP Billiton, recently got a lot of attention by suggesting that the so far insatiable Chinese demand for commodities may have come to an end. The argument is simple enough: the rate of growth in China is slowing. However, the implications for commodity exporters, such as Australia, who have invested dizzying sums of money in expanding capacity to reflect an ever higher increase in Chinese commodity hunger, may be very big indeed.
Following the pattern we have identified in other countries in the region, Ukraine is once more getting itself into a deeper and deeper mess
The market has recently taken relief from the decision by China to lower the reserve requirement ratio (RRR) as well as the signal that it will be the first of a series of cuts. The real story however is that the shift comes in response to a sharp slowdown in both domestic and external demand in the first quarter of 2012 and thus it seems that investors may have taken too much comfort in the strong Q4-11 GDP print.