Emerging Markets May Now Be Submerging
Kurt Brouwer July 1st, 2008
Source: Calculated Risk
China and India lose their appeal to investors on inflation fears (Telegraph.co.uk, June 20, 2008, Ambrose Evans-Pritchard)
The world’s fund managers are pulling their money out of China and India at a record pace on mounting fears of inflation and are now more pessimistic about global equities than at any time in the past decade.
The latest survey of investors by Merrill Lynch shows that Europe has become the most unpopular region, while Britain is still trapped in the doldrums.
But the big surprise is the sudden change in view on the emerging powers of Asia, as overheating and spiralling oil costs spoil the boom.
“World growth is slowing and yet central banks might still have to tighten monetary policy, that is what is scaring people,” said David Bowers, the organiser of the survey. The vast majority of fund managers think earnings forecasts have lost touch with reality.
The exodus from China reached fever pitch this month as investors slashed their net “weighting” position to -58, down from -14 in May. The Shanghai bourse had already fallen by almost half since October.
As the chart above shows, the Shanghai stock market is off a bit more than 50% from its high point. Now, admittedly, it’s high point was a bit ridiculous, but a 50%+ drop is harsh medicine indeed. The concerns over China range from its high inflation rates (see 50% Chance of Recession — In China) to the impact of high energy prices on its growth rate plus the fact that as U.S. growth slows, exports to the U.S will slow as well. In addition, the Chinese regime has plenty of internal strife that has surfaced despite the clampdown on news from China. How quickly things change.
…Mr Bowers said Europe is now facing a triple whammy as the downturn in global export markets combines with a strong euro and a monetary squeeze.”Eurozone retail sales have been worse than in the US on a year-on-year basis and eurozone GDP growth has also been worse,” he said. “If you look at Spain and Italy, and even France, they are very weak.
“The Fed has eased dramatically, but the ECB hasn’t eased at all. It intends to tighten regardless of the consequences on growth. This is what is eating away at confidence in Europe,” he said.
Merrill Lynch said fund managers were belatedly adapting to a global inflation shock that poses a serious danger to asset prices, and risks setting off “civil protest” in Argentina, Indonesia, South Africa and the Gulf states.
As the new story unfolds, America is coming back into favour, emerging as a sort of safe haven in a fast-changing world where trusted institutions command a premium. Investors are quietly rotating back into Wall Street - despite a chorus of pessimists. A net 23pc are overweight US equities, the highest since August 2001.
The long awaited “decoupling” has begun.
The United States looks like the winner after all.
I laughed when I read the second to last line — ‘The long awaited “decoupling” has begin.” This is a rather snarky reference to a popular yet faddish theory about emerging markets. The term decoupling refers to a theory that emerging markets such as China, India, Brazil and Russia — to name a few — are less dependent on exports to the U.S. and other developed countries than they were in the past. Therefore, a recession in America should not hurt them as much as it might have in the past. I believe there is some truth to this. However, we are probably seeing a global economic contraction, not just an American one. In the case of a global economic contraction, even a relatively mild one, emerging economies would tend to get hit harder than more developed economies, which have much more powerful internal markets for their products and services.
This last sentence about America being the winner may be a bit premature, but surely in a world where uncertainty abounds, the U.S. has to stand out above the crowd for the safety conscious investor. Interest rates are low and inflation — though surging right now due to oil and food prices — is still under control. Stocks have fallen nearly 20% from their high of last October. And, real estate is steadily being marked down as well. From the perspective of the global fund manager, what’s not to like?
- Business , Economy , Geopolitics , Investing , Money , Personal Finance
- Comments(0)
Did you enjoy this article?
