INVESTORS are increasingly disillusioned with extreme monetary policies, the pace of economic growth and the performance of equities in developed markets.
In virtually every country where central banks have moved interest rates into negative territory, equities have suffered. The most dramatic example is Japan’s Topix index, which is down more than 15pc this year. At the same time, cheap funding isn’t enticing companies in developed economies to invest. Capex in developed economies is currently contracting at an estimated rate of 3pc, according to data from JPMorgan.
Emerging markets have, of late, performed better on a relative basis — both measured by economic growth and asset prices. EM shares have registered a far more respectable showing than developed markets. So far this year, EM bonds and equities are four of the top six performers globally.
There is concern that the recent gains are merely the product of central bank largesse in several developed economies. Indeed, the best performance has come from some of the hardest hit markets — Brazil and Russia among them. The Turkish lira, for example, dropped more than 7pc in the wake of the attempted coup but has since recovered more than half those losses.
Both the recent data and the outlook for economic prospects in emerging markets for the next few months look attractive, especially in East Asia.
For decades, manufacturing for export has been the lifeblood of East Asia. Now, the great exporters of East Asia are in a sweet spot again, having achieved an improvement in both industrial production and the level of their exports. Business spending in emerging markets is tracking a 7.5pc gain, after a big drop in the first quarter, and despite higher interest rates in that part of the world.
For decades, manufacturing for export has been the lifeblood of East Asia. Now, the great exporters of East Asia are in a sweet spot again, having achieved an improvement in both industrial production and the level of their exports
Production in East Asia has increasingly come to mean technology. Regional tech output was up 7pc the three months to July from a year earlier. Taiwan’s exports saw growth of more than 5pc in July, much stronger than forecast. Most economists expect tech to be one of the few real sources of growth in China in coming months.
But how lasting will the pick-up prove to be, especially in a world where developed markets have had no growth in business spending? Is consumer spending in the big developed markets, especially the US, a sufficient catalyst for a lasting increase in activity for east Asian manufacturing?
Economists such as Sin Beng Ong, regional economist for JPMorgan in Singapore, fear the lift from tech in East Asia will prove temporary. “Developed market capex drove Asia. The tech cycle in Asia mirrors the weakness in capex in developed markets,” he says. “The productivity gains from investing in tech have gone down. There will be a periodic increase in activity but then it will die down; you will see fluctuations around a flattish line — not an ascending line, as was the case prior to the 2008 financial crisis.”
Moreover, apart from technology, production in the region generally remains stagnant. And despite the bright spot in technology in East Asia, the region remains vulnerable to shifts in monetary policy in developed economies.
Economic fundamentals matter less everywhere in a world in which central bankers in developed economies adopt what used to be considered extreme monetary policies to try to devalue their own currencies and stoke inflation. Who could blame their counterparts in emerging markets should they seek to ease their own cost of money.
“The Fed has always believed that rate increases and normalisation were around the corner but never been able to deliver,” Larry Summers noted in a blog following the symposium of central bankers two weeks ago in Jackson Hole, Wyoming. “When the Fed predicted last December that it would raise rates four times in 2016, market participants saw a disconnect from reality.”
Still, if the Fed ever does lift rates again, however incrementally, East Asia is still vulnerable to a repeat of the taper tantrum of three years ago after Ben Bernanke, then Fed chairman, signalled the US central bank would scale back its quantitative easing. Whatever the fundamentals, this is a world in which the monetary policy in developed economies still holds dangerous sway.
Published in Dawn, Business & Finance weekly, September 5th, 2016
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