The strong rally in global emerging market securities that began in early summer and appeared to reach its peak in September is only sustainable if and when China gets its economic house in order, various experts said.
“It’s all about China,” Laurence Fink, chairman and chief executive officer of New York-based BlackRock, told Emerging Markets on the sidelines of the IMF annual meetings in Tokyo. Everyone, Fink believes, is looking to Beijing for answers, in the hope that China’s leaders will find a way to boost economic growth at home while opening up the country’s vast internal markets to greater external financial investment.
“Only one thing can make emerging markets continue their rally,” says Fink, “and that is for China to open up its capital markets” to foreign investment. “And that of course will happen in time.”
Other leading investors share Fink’s view, though many express their disquiet at China’s recent travails, with gross domestic product tipped by the IMF to slow to 7.8% this year, the lowest annual rate of growth posted by the world’s second-largest economy since 1999.
“We are all waiting for China to show signs of life,” says Chris Palmer, director of global emerging markets at London-based Henderson Global Investors. “There’s no reason why the [current] emerging market rally has to end, but it all depends on good news coming out of China and in particular out of the Chinese leadership transition”, set to take place in November.
Investors are also waiting for signs of life in China’s stock markets, which have underperformed bourses across the developed and emerging worlds over the past several months. After hitting a 12-month low on May 23, India’s Sensex index had gained 17% by the close of trading October 8, with Russia’s MICEX rising by 14% over the same period. Brazil’s Bovespa also enjoyed a strong summer, gaining 12% in the two months to 5 October.
By contrast, the Shanghai Composite has shed value throughout the summer, sliding 14% in the five months to 9 October.
Palmer also believes emerging markets remain influenced by external forces – notably quantitative easing in developed countries - to an unhealthy extent.
But experts believe these monetary easing measures, which have tempered market conditions in the developed world and compelled investors to look elsewhere for return, are the primary reasons behind the recent surge in emerging market valuations.
Investors in emerging market stocks, Palmer says, need to take the long view on valuations rather than capriciously plunging in and out of the market depending on the latest bit of news.
“This is just the start,” he added. “We should see more catalysts enter the emerging market story in late 2012 and early 2013. The US fiscal cliff will make people risk averse”, causing them to sell emerging market stocks, only to come rushing back “when they realise the fiscal cliff isn’t as bad as everyone thought. The Chinese election is another catalyst, and there will be another, and then another.”