Emerging Market Equities Decline over Slowdown in China, Lower Energy Prices
Emerging market equity prices declined further in July, as concerns about slower growth in China as well as lower energy and commodity prices hurt investor optimism. Chinese equity markets, which had seen significant gains over the last one year, corrected despite the government’s efforts to stabilize the market. Pessimism about the Chinese economic growth outlook increased as external trade and industrial output data have been more subdued than expected. Select other Asian markets also declined as weaker Chinese demand for components and other inputs could derail export growth for these countries. Prices of oil and industrial commodities such as iron ore declined further, after the moderate recovery during the second quarter. This had a negative effect on most Latin American markets as well as Russia.
Manufacturing activity remained lackluster across most major emerging economies, including China, Korea and Indonesia. Factory output continued to decline in Brazil and Russia as lower commodity prices restricted domestic demand and delayed capital investments. India remained an exception, as the country continued to see gains in manufacturing output. New export orders for the manufacturing sector were also relatively more subdued in most countries, including China, Korea and Brazil. In contrast, services activity continued to expand in most countries, except Brazil.
Near-Term Outlook
Even as investor fears about the sustainability of Chinese equity price gains have worsened, the country’s economic trends could turn brighter in the coming quarters. External trade has been the weakest sector this year so far as subdued global demand restricted export gains. As consumption demand in major markets such as the U.S. and the Eurozone picks up, Chinese exports could see a revival during the second half of the year. Lower oil prices could further boost overseas consumer demand, and widen China’s trade surplus as imports decline. Domestic demand in China could also get a further boost from interest rate cuts and other monetary policy measures taken by the country’s central bank. Property prices in China have stabilized and select cities have started seeing a recovery in average home prices. This should help allay fears about a deeper economic crisis in China, triggered by declining property prices.
Select other large countries such as India and Indonesia are also likely to see healthy economic trends during the second half of this year, as well as in 2016. Though export data for both countries remain weak, domestic demand has been relatively healthier and could benefit from increased consumption. Cheaper oil should benefit both India and Indonesia significantly, and help improve the fiscal health of their governments. Central banks in these countries have been cautious in lowering interest rates, but further declines in inflation could encourage them to make borrowing costs cheaper and support domestic consumption. While India is expected to be the fastest growing major emerging economy in the medium term, Indonesia is forecast to expand at a steady pace of 5 percent this year as well as in 2016.
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This post originally appeared in Advisor Perspectives.
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