China risk is short-term - Aviva

China risk is short-term - Aviva

Chinese GDP figures point to the slowest rate of growth in 25 years, signalling a tough road ahead for increasingly dependent global economies. The country saw growth of 6.9 per cent during Q4 of 2015, short of government expectations of 7 per cent and below last year’s growth of 7.3 per cent.

This is the second set of weaker-than-expected data from China this month. The year started with disappointing manufacturing data that led to a rout in Chinese markets after stocks fell by 7 per cent.

While markets are concerned about increased volatility due to a Chinese slowdown, strategists have termed this as a ‘short-term’ risk. “Our base case remains for a soft landing for growth in China and a gradual, managed depreciation of the renminbi,” said Liam Spillane, head of emerging market debt at Aviva Investors, adding that an improvement in the growth fundamentals in emerging market economies would provide a significant boost to their outlook.

Article continues after advert

The developing world has experienced currency depreciation and deteriorating terms of trade due to the fall in commodity prices as well as a slowdown in global trade since 2011. Added to that, a change in monetary policy from the US Federal Reserve also led to the formation of ‘fragile five’ in January 2013, a group that included countries with weak currency and high current account deficit.

But since then these economies have started to stabilise by strengthening their domestic growth and introducing reforms. And Mr Spillane expects the economies in this sector to slowly start stabilising.

“Emerging economies have maintained their stability throughout this period. A long and painful period of economic adjustment is having a positive impact on structural imbalances,” he said.

An increasing number of fund managers now prefer to look at single countries in emerging markets, rather than focusing on them as a group. While acronyms such as Brics, Civets, Mint & Mist have been quite popular in the last few years, they are slowly fading away since each country has its own set of challenges.

The cover story in Money Management’s January edition outlined the issue with grouping emerging markets under various acronyms. The divergence of the initial Bric countries over the past decade highlights the typical lack of correlation between countries yoked together under acronyms.

Lack of flexibility and changes in their situations over a period of time have led investors to look instead at single-country funds. Most fund managers prefer to focus on an individual market where they can understand the dynamics well and take calculated risks.