The slowdown of growth in China could cause central banks to respond aggressively and suppress investment in other emerging market economies, according to Daniel Casali, chief investment strategist at Tilney Smith & Williamson.
Casali appeared on the FTAdviser podcast alongside David Rees, senior emerging markets economist at Schroders, to talk about the outlook for emerging markets post-Covid.
China’s zero-Covid policy, said to be the strictest approach to fighting the pandemic of any country in the world, is hurting its economy.
As a result, the IMF has cut its GDP growth forecast to 4.4 per cent from 4.8 per cent for this year amid concerns around lockdowns and supply chain disruptions.
Casali said the supply chain disruption issue "could not have come at a worse time, as there are still very tight supply chains. If China is going to slow down a little bit that affects demand for raw materials, and countries like Brazil would be vulnerable to this. So China does affect the rest of the world in terms of raw material demand".
He said: “If China does have a significant impact on supply chain disruption, which seems to be the case, and it leads to higher inflation, not just in EM but in the West, it could lead to central banks, such as the Federal Reserve and the Bank of England, to maintain a more hawkish monetary policy that could translate in a convoluted way back into EM and suppress not only global growth but also investment in EM.”
Rees said one of the key questions over the next two years is how China moves away from its zero-Covid policy.
He added: "A large part of the global economy is still prone to very strict lockdowns and that could upset markets. It could bring bottlenecks in supply chains back to the fore at a time when inflation is high. That is an issue that needs ironing out.”
Emerging market economies are also facing sovereign debt worries as many borrowed to tackle the pandemic.
Rees said, looking at the external liquidity indicators, some of the smaller frontier markets have issues, but with the bigger emerging market economies, “they are able to ride out those problems, from an economic perspective”.
And although they are considered risky assets, Rees said the basic external fundamentals and debt dynamics in a lot of EMs have improved, meaning that in recent years EM regions have not faced crises on the level they had in the 80s, 90s and 2000s.
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