Rowan Dartington Signature’s Guy Stephens on the impact of China’s economic slowdown on emerging markets and global growth.
We are all familiar with the collective term applied to the investment markets of those countries from the emerging world which are growing rapidly and seeking to join the ranks of developed nations: the so-called Emerging Markets. A subset of this was coined as China was breaking ranks, known as the BRIC countries of Brazil, Russia, India and China.
This was before the oil price had halved and before Modi was elected in India which has resulted in that country being the only remaining emerging market of this grouping showing signs of increasing economic growth.
In the absence of credible economic data from China, we have been digging around in the data from the surrounding emerging nations for discussion at our Asset Allocation Committee. Many of these countries supply China and are therefore significantly exposed to their economic slowdown. In addition, some are also exposed to weakness in commodity and oil prices which could have implications for their sovereign finances, especially as some have significant debt where the US is the creditor.
We believe this had a strong influence on the World Bank and IMF advising that the Federal Reserve Bank should not raise interest rates at the last meeting for fear that the debt financing costs of some emerging nations could push them into default, as happened in the Asian crisis of 1997.
This has been reflected in the currencies of these emerging markets, further exacerbating their cost of debt financing. Interestingly, our own bond market analysis has shown that Asian economies learnt a lot from that experience and have substantial currency reserves to immunise the risk.
So, what did our analysis conclude? The important features are the size of the export component of a country’s GDP and how much of that goes to China. Taking Australia as an example, in 2014, 21% of their GDP was composed of exports (Source: World Bank) and of that 36% went to China.
Intuitively, we know that much of this would have been iron ore and copper for the construction industry and we know that the slowdown in demand and the price falls are pushing the Australian economy into recession for the first time since the establishment of the BRIC acronym.