Global stockmarkets tumbled last week.
Allegedly, this was due to Russia and China. China, so the story goes, is having a hard landing, this time due to softer-than-expected data, a lone domestic corporate bond default and the unwinding of copper positions used by Chinese corporates as finance collateral.
There is a problem with this theory. China is not having a hard landing and we don’t think that hard landing fears have caused stockmarket weakness in developed countries.
Rather, such fears are a convenient vehicle for revving up negative sentiment to support a broader unwind of pregnant positions in developed equity markets.
The same can be said about the Russia story, whereby Russia is holding the entire civilised world hostage over Crimea, threatening the very foundations of global security.
This is of course a bit ridiculous. For one, West Texas Intermediate crude would not be trading below $100 per barrel if there was a real risk to Russian energy exports.
Russia and the West have overwhelming incentives to compromise, but only after a suitably public row. For now, this row, too, has become a great vehicle for amplifying the technical unwinding of positions in stockmarkets.
But behind the juicy China and Russia stories lie other – real – reasons for the continuing weakness in developed stock markets more fundamental and far closer to home. The US Federal Reserve has been sitting at the very top of the world’s profligacy rankings, but is now slowing its bond purchases.
Quantitative easing policies in the US and Japan supported stockmarkets in both countries for years, to the point that technicals and valuations in both markets rose far in excess of what is justified by still relatively weak fundamentals.
Add into the equation not particularly encouraging US data and growing pessimism about Abenomics in Japan and you begin to get at the real reasons for the ongoing pessimism – it is justified by developed market fundamentals, developed market technicals, as well as developed market valuations.
Emerging market fundamentals have largely been immune to the hugely negative sentiment about them in the past 12 months.
Each successive sell-off in emerging markets is shallower and shorter for three reasons.
First, the valuations are becoming more attractive with each sell-off; second, there are fewer sellers left as technicals improve with each sell-off and third as emerging markets fail to deliver a genuine crisis with each successive sell-off investors slowly come around to the view that they are perhaps not as fundamentally vulnerable after all.
Undoubtedly, there will be further emerging market sell-offs because the market still operates from the mistaken assumption that emerging markets are more vulnerable to tapering than developed economies.
But, as the price action is telling us, the conviction behind this assumption is beginning to be challenged. Emerging market valuations, technicals and fundamentals are beginning to make developing market stocks look good at the margin and developed markets more dubious at the margin.
This is how markets begin to turn.
Jan Dehn is head of research at Ashmore
