Emer gi ngMar ket sOut l ook Emer gi ngMar k et s( EM)ar es etf orar oc k i er t i met hi sy ear–s i gni f i c ant l ydi f f er entt hanj us t af ew y ear sagowheni nt er es tr at eswer enear z er o,c ommodi t ypr i c eswer es t i l lhi ghandt he dol l arwasweak .
Thi sc oul di nt ur nl eadt ogr eat erf i nanc i al mar k etv ol at i l i t yand c oul ds i gni f i c ant l yr educ ec api t alf l owst oEM c ount r i es . The s i t uat i on c oul d be wor s ened by pr obl ems c aus ed by t hel ow c ommodi t ypr i c esand s t r ong dol l ar due l ar gel yt o Chi na’ s dec l i ne i n ec onomi c gr owt handal ac kofdemand. L ook i ng at t he f i gur e,whi c h c ompar es emer gi ng i ndexes andt heMSCIWor l dI ndexs i nc e 2010,one c an c onc l ude t hat manyEMsar es t i l ls t r uggl i ngt o k eepupwi t ht hes amemar k et r et ur ns as i nt he r es toft he wor l d.
Chi na Chi na’ s gr owt h has i nr ec ent y ear sbegun t os l ow c ons i der abl ydownc ompar edt ot hel as t c oupl e of dec ades .F or t he s ec ond quar t erof2015i twas expec t edt hatChi nawoul dnot meeti t s
expec t at i onof7% GDPgr owt h,but s ur pr i s i ngl yt heymeett hi st ar get . I nJ une2015,t hePeopl e’ sRepubl i c BankofChi nai nt r oduc edquant i t at i v eeas i ngandc utt her es er v er equi r ementr at i o,t hi swasdonei n or der t os t abi l i z et he ec onomi c gr owt hl ev elandr eac ht heannual 7% t ar get . Cur r ent l y ,Chi nai st hewor l d’ sl ar ges ti mpor t erofoi landc oalandi s t her ef or ebei ngpos i t i v el yaf f ec t ed byt hel owoi l pr i c es , meanwhi l eexper i enc i nghi s t or i c al l yl ow dr ybul k f r ei ght r at es ( Meas ur ed by t he Bal t i cDr yBul kI ndex) . Thi sef f ec ti sexpec t edt opr oc eed i nt hes hor tt er m.Thef ut ur er i s k s f ac i ng Chi na der i v es es pec i al l y f r om i t shi ghl yv ol at i l es t oc kmar k et s ,i nc r eas i ngc ompanydebtdue t ot heappr ec i at i ngUSD as25% of Chi nes ec ompani esdebti sdenomi nat ed i n USD,and t he pr obl ems ar i s i ngf r om t r ans i t i oni ngmor et owar dst er t i ar ybus i nes sar eas .
I ndi a I nr ec ent y ear sI ndi a has been s t r uggl i ngwi t hi nf l at i onatt he10% l ev el ,butt heRes er v eBankofI ndi a hasi n20132014boughtbac kgov er nmentbondsandadopt edf l exi bl ei nf l at i on t ar get i ng,whi c h has r es ul t edi nal ower i ngofi nf l at i ont o ar ound5% i n2014andt her ebyi nc r eas edc r edi bi l i t y . Thec ur r entl ow oi lpr i c eand t he pr os pec tofi ts t ay i ngati t sc ur r ent l ev elwi l lbe benef i c i alt oI ndi a’ s ec onomi cgr owt hi nt he s hor tt o medi um t er m. Pot ent i al r i s k s ar i s es es pec i al l y f r om i t sownec onomi cpol i c ygov er nanc e,andext er nalt hr eat ss uc h ashi ghl yv ol at i l ef i nanc i almar k et s , andt heUSr ai s i ngi t si nt er es tr at es , whi c hwi l l dec r eas ei t sc ompar at i v e adv ant agei nt er msofexpor t .
FI NANCELAB-I SSUESEPTEMBER2015
I ft heF eder alRes er v ei nc r eas es r at es i n Sept ember ,i nv es t or s c oul dr et r eatf r om EMs ,ac c or di ngt oWor l dBank ’ sl at es t2015 “ Gl obal Ec onomi c Pr os pec t s ” r epor t .
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