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Emerging Markets Have Different Reactions to China’s Decision

Emerging markets will be in focus as central banks around prepare to meet the upcoming challenges during the month of September. The main trends will guide investors as they analyze their portfolios:

  • China is expected to announce a new round of stimulus measures to jump-start its economy.
  • Commodity importing nations continue to benefit from the lower price of energy
  • The U.S. Federal Reserve’s interest rates hike faces uphill battle after macro conditions have shifted.

Emerging market currencies have hit multiple year lows as the result of the Chinese Yuan devaluation and the expectation of an increase in the interest rate by the U.S. Fed.

Emerging markets have matured from the previous crisis and are now in a better position to capitalize on the opportunities to expand their exports in a better-connected global market. Economist Eric Rees from Capital Economics remains optimistic about EM equities:

First, it is difficult to argue that current conditions in the global economy are anywhere near as bad as they were in 2009, when there was a serious risk that the world’s financial system would collapse. Second, we think the sell-off in many EM currencies is beginning to look overdone. Various indicators of “fair” value do not suggest that they need to weaken further. Third, we do not think that China is about to devalue the renminbi substantially and spark currency warfare. And fourth, we doubt that commodity prices will continue to fall. Indeed, we forecast that the price of many key commodities, including oil and copper, will rise in the years ahead. Commodity producers have a large weight in many equity markets outside of China.

Here are the few examples of the emerging market opportunities as the three main global economic themes develop in the short and mid term:

India. The Indian economy continues to show the resilience forged by the Modi government. The Indian Rupee is among the best performing of the Asian currencies and the Reserve Bank of India (RBI) Governor Raghuram Rajan has said he will use the country’s foreign exchange reserves if needed. Indian companies are benefiting from lower energy prices and should capitalize on growing market share against close competitors.

Mexico. An all time low in the currency should see the Mexican economy grow via exports with its major trading partner the United States. The gain in manufacturing and service exports should offset the losses from lower energy shipments. Membership in the Trans Pacific Partnership (TPP) will further connect the Latin American nation with new markets in Asia. Some of the tariffs won’t come down right away, but the long-term prospects for the Mexican economy are positive.

China. The decision to allow pension funds managed by local governments to invest up to 30 percent of their net assets would have been a major announcement at any other moment in time. The fact that the market was expecting a more direct use of monetary policy; for example a new stimulus package, put pressure on global stock markets. China has acknowledged it needs to do more to hit its growth target for the year, and further stimulus measures should be announced as the central bank has pledged to boost the growth of the economy.

Stronger emerging markets will pull ahead of the pack, as the lessons learnt from past experience will come to the forefront. China, India and Mexico are prime examples of nations that have evolved to meet the higher standards demanded by global investors and are well positioned to take advantage of new inflows into their economies.


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