Emerging Markets At A Turning Point

September 16, 2015

 

p10_i1_Sponsored_Invesco PowerShares_Global_BuybackViktor Nossek
Director of Research
WisdomTree Europe

Many feel that emerging markets are at a turning point in the wake of China's slowdown. WisdomTree Europe Director of Research Viktor Nossek has some advice for investors looking to navigate the new landscape.

What is the general outlook for emerging markets? In particular, what's happening with monetary policy and fiscal stimulus in those markets right now?
At the center is China, and China is looking to do whatever it can to prevent a hard landing and instigate some degree of soft landing in the economy. It feels compelled to use unconventional policy tools that may actually trigger geopolitical tensions in and around the region, as it already devalued the RMB significantly. This is evidence that the slowdown is deepening at a rate that is too uncomfortable for officials to accept. I think the Chinese officials are well aware that there's a slowdown unfolding, but it's all about how you manage the slowdown.

It's not that they're trying to reinvigorate growth. They're aware of the leverage existing in the system, both financial leverage and the operating leverage that is in the process of being unwound. As a result, the slowdown is inevitable. But it needs to be a managed slowdown. The devaluation of the RMB has essentially come as a result of conventional policy tools not really working to help exporters to normalize. We've seen an export slump unfolding. And if you compare those rates of decline to the period during the financial crisis, they're pretty similar.

This has really spooked the Chinese officials. They believe they need to manage this slowdown in exports a bit more carefully and give the export space another shot in the arm by loosening the trading band on the RMB. The spillover effect now is that other trading partners of Asia have a strong sense that they could also devalue their currency. The whole region is very much driven by trade. I'm looking at countries such as Japan—the second or the third largest trading partner of China—which already instigated the quantitative easing, and has helped sharply devalue the dollar. Japan may actually feel compelled to accelerate quantitative easing on the back of that to help their exports be more competitive with China.

I think the geopolitical tensions should be rising as a result of this. And the equity risk premia should also rise, which means there should be further selling pressure on Asian equities, short term.

 

 

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