A macro view of recent market volatility
China’s recent devaluation of its currency has raised a lot of questions, and as a result, we have seen a near-panic response across financial markets. However, we do not believe that the renminbi’s depreciation is something that should come as an enormous shock to global markets.
While the renminbi has depreciated about 5% over a short time frame, we believe the pace is likely to remain relatively controlled as the government incrementally moves towards a more market-driven environment. Importantly, we do not think the move is a signal of a massive depreciation to come.
Additionally, although the decision to depreciate the renminbi resulted in a near-term increase in volatility, we don’t believe it will fundamentally amplify currency depreciation across Asian or emerging market currencies over the longer term. The neighboring Asian countries (such as Japan, South Korea, Indonesia, Malaysia and Singapore) have already experienced large declines among their currencies, whereas the level of the renminbi has remained relatively strong even when accounting for its recent depreciation. Therefore, we do not expect that China’s recent devaluation will likely erode the competitiveness of its neighboring countries or their exports.
When we look at how much market panic there has been, one might be under the impression China is headed full speed into full-blown recession. That is not our call. While we do expect moderation in China’s growth, we continue to see it as healthy and an inevitable normalization for an economy of its size. The thesis as to why we are invested in Asia remains unaltered: we expect economic growth in China to moderate, but not experience a hard-landing.
Fear among emerging markets
In light of the concerns about China, as well as potential rising interest rates in the United States, investor fears regarding emerging markets have resurfaced, although we believe that certain countries have been indiscriminately punished. A central part of our global thesis remains positioned around the strengthening economy in the United States, which is a key destination for many emerging market exports. It is our expectation that the strong labor market will provide a boost to the US consumer going forward, which has been a traditional engine for global growth and support to countries which export to the United States, including Malaysia and Mexico.
Malaysia is an example where we believe investors have been overly negative. Malaysia continues to be viewed through a prism of being a commodity exporter, but it actually has a well-balanced export basket, including electronics, which would be supported by a resurfacing of the US consumer. Additionally, Malaysia maintains a healthy current account surplus and holds a large cushion of international reserves with enough to cover over seven months of the country’s imports. Despite this backdrop, the Malaysian ringgit is currently trading near levels last seen during the Asian financial crisis of the late 1990s.