Chinese growth will be a prime issue
March and April have seen markets take a pause for breath after the heady rise of the two previous months.
The MSCI Emerging Markets benchmark index has now fallen some 5 per cent from its high for the year, giving back much of the outperformance over developed markets recorded in January and February.
Nevertheless, overall returns for the first four months of the year are still more than 10 per cent, which is a welcome improvement on 2011. Reasons for the market pull back included China growth concerns and the prospect of Spain becoming the next challenge for European policymakers.
The so-called Bric markets (Brazil, Russia, India and China) led the decline over this period. India saw its political situation deteriorate while Russia, in spite of high oil prices, underperformed as rumours circulated about possible increases in taxation for energy companies.
Brazil was a laggard thanks to a concerted effort by the authorities to push down the value of its currency. In China fears of a slowdown in growth meant materials and energy were again the worst performing sectors while defensive areas such as staple consumer stock performed strongly.
Looking ahead, Chinese growth will be the prime issue for emerging market investors over the ongoing trouble in Europe and tensions in Iran.
Recent economic data releases are heavily distorted by the impact of Chinese New Year. The week-long Lunar New Year holiday in January disrupted China’s usual export and import flow for the first two months of the year – but still give a reasonably clear picture of an economy growing well below the pace which is expected. Chinese premier Wen Jiabao’s forecast of 7.5 per cent growth may even be a bit of a stretch, given that both net exports and investment in fixed assets such as real estate and infrastructure are going to be much lower contributors to growth than in the past.
The property market is a further cause for concern given the authorities are reluctant to help revive a market that in their opinion remains extremely overvalued in spite of recent price declines. A small cut in reserve requirements – the minimum amount of capital a commercial bank must hold on its balance sheet rather than lend out – is a possibility, if only to counter the effects of moribund growth in foreign exchange reserves. Anything more is unlikely.
China has reached an interesting inflection point where, due to changing demographics, the number of new entrants to the job market is falling and thus the need to create jobs is much diminished. Furthermore, the authorities are only too well aware that decades of strong growth has created significant disquiet due to both the environmental damage and the rise of massive inequalities.
A slower rate of growth is, therefore, both inevitable and desirable, and we should not expect any attempt at meaningful stimulation unless there are clear signs of a much more significant slowdown.
William Calvert is an emerging markets fund manager at Polar Capital.