QUARTERLY INVESTMENT STRATEGY: EMERGING MARKETS OUTLOOK
After having been overly optimistic on the emerging world for much of the past five years, the consensus has finally given in. China has been at the root of recent concerns. Its slowdown and, just as importantly, shift away from investment-intensive growth have led to a reassessment of the prospects for many other emerging economies, particularly commodity producers.
IN A NUTSHELL
- Chinese-driven concerns have put the final nail in the coffin of optimistic consensus expectations for emerging world growth.
- Fears of a systemic crisis and widespread growth collapse appear, however, misplaced – in many countries a combination of low inflation and loose monetary policy policies is supporting consumption.
- China’s transition continues, with services and retail sales now accounting for 45-50% of the economy.
For sure, the emerging world is facing a prolonged period of slower growth and several countries are in for painful structural adjustments. But fears of a systemic crisis and widespread growth collapse seem exaggerated.
Commodity-exporting countries are under the most pressure. Terms of trade have also now fallen below the 2008 crisis low, which does not bode well for balance of payments stability and warns of a potential deterioration in foreign exchange reserves (already visible in countries such as Brazil and Columbia).
At the same time though, consumers across much of the emerging world, particularly Asia, continue to benefit from low inflation and loose monetary policies – trends that are likely to persist during coming months. Debt burdens in most emerging economies have also fallen and become more manageable.
Turning to China, we remain of the view that its economic transition will continue, translating into a slowdown but not a hard landing. 2016 growth should be slightly lower than in 2015, but still above potential. Offsetting the industrial slowdown will be the consumer, witness strong retail sales and a solid labour market, and the government, determined to support the economy with both fiscal and monetary stabilisers. This is not to say that China faces no headwinds. The country clearly needs to address the slowing manufacturing trend, the loss of competitiveness from higher wages and a rising currency, as well as the large excess capacities following years of over-investment.
The main risk for China would be a return to its old growth model, as this would in effect mean a failure to transition from an emerging to a developed economy. Such a scenario could occur in the event of an uncontrolled manufacturing sector collapse, a sharply weakening consumer, or heightened geopolitical tensions in the region.
The tertiary sector, i.e. mainly services, and retail sales now represent between 45 and 50% of the Chinese economy. The labour market is also looking robust with a high job vacancies to job seekers ratio. Finally, the renminbi has strengthened substantially, in what is probably the most obvious symptom of the Chinese economic transition.
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