Brian Tora: China woes damage faith in emerging markets


While Greece has not exactly dropped out of the picture, its influence on market sentiment has been well and truly eclipsed by China. Three currency devaluations in as many days certainly sent investors diving for cover. The issue is more over the extent of the Chinese economic slowdown than anything. Recent figures point to a drop in exports, so cutting the value of the renmimbi looks an obvious ploy.

These worries have done nothing to restore faith in emerging markets, which now look cheaper against developed economies than for many years. It was not so long ago I was chairing conferences where a succession of speakers banged the drum for the emerging world, saying that the future undeniably lay there.

Of course, the writing had been on the wall, with many companies engaged in the developing world standing at vast premiums to their developed nations’ equivalents. The question now must be whether China’s slowdown is likely to prove a further drag on these once buoyant markets where a higher degree of risk appears to have been priced in – at last, many investors will be saying.

Two factors look likely to continue to weigh on these markets. First, the downward pressure on commodity prices, itself a direct consequence of what is going on in China, will have a disproportionate effect on a number of emerging countries.

Second, and arguably the main reason behind the decision of the Chinese authorities to lower the value of their currency, the strength of the US dollar has been dragging cash out of many of these nations, depressing currencies and adding to the general air of economic gloom.

Otherwise, many of the core arguments for believing most of these countries have much ground to make up on the developed world remain intact, though there are more than a few notable exceptions where local concerns will outweigh these positive factors. In particular, the fall in the oil price will be causing havoc in a number of emerging economies. Interestingly, all of the Bric economies are suffering pressures at present. The second tier Mint countries – Mexico, Indonesia, Nigeria and Turkey – are not without problems either.

But China remains the key. It is the world’s second most important economy, worth $11trn and accounting for 15 per cent of global output. The importance it has is exemplified in the latest minutes from our monetary policy committee, where it merited 10 mentions: three times the usual reference. Putting aside the collapse in markets over recent months (the stockmarket there is still more than 60 per cent up on levels a year ago), the drivers that propelled the world’s most populous nation into the number two slot – exports and infrastructure – have inevitably run out of steam.

The trick now is to turn this Leviathan into a more consumer-driven economy, with a greater emphasis on service industries. Successfully accomplished, there could be benefits for the emerging world, as well as economies like our own. Failure could strangle the fragile global economic recovery. All eyes will need to be focused east for a little while.

But to return closer to home, Greece is still in the news. It is worth remembering that the problems assailing the Greek economy are far from new. I am indebted to an old chum who shared the following quote from the 1873 Annual Report from the Corporation of Foreign Bondholders with me: “The growth and prosperity in Germany has enabled its citizens to take a still greater share in American and Foreign Loan transactions. However, the deplorable condition of Greek credit remains without remedy”. Plus ca change.

Brian Tora is an associate with investment managers JM Finn & Co.