The rapid decline in global growth has hurt stock markets of the emerging world. In the spring, U.S. growth was the first to come under pressure.
The escalating crisis in the euro area was then brought back fears of a recession not only in Europe but also in the United States. As in 2008, China has come to follow the example of these regions. Sensitivity to the negative growth of world trade and doubts related to the selected options to stimulate domestic demand have weighed heavily on the Chinese stock market in recent months. Concerns about China’s growth largely explain why emerging markets have performed less well than developed markets this year.
While Europe seems mired in crisis and unable to save the monetary union, China is preparing to adopt an ambitious recovery plan. The first signs are clear. For the first time since the early 1990s, local governments were allowed to issue their own bonds. Shareholders are harvested for infrastructure investments. The decision last week is the first step toward stimulating domestic demand.
Meanwhile, restrictions on candidates in the real estate buyers are gradually relaxed and a support plan for small businesses has been announced.
For those investing in emerging markets, the positive momentum in China, on the one hand, and the malaise in Europe, on the other hand, are confusing. The sensitivity to an improved outlook for growth in China is large because China is the largest market for exports from emerging markets. Therefore, when investors are more confident in the stimulus package in China, this is a strong positive signal for all investments in emerging markets.
The problem is that the positive effect of China could be offset by a further escalation of the crisis in the euro area. The risk for banks and the entire European economy is high as long as government leaders fail to agree on a lasting solution to the debt problem. This systemic risk is so important that it is difficult to make investment decisions based on developments outside Europe, such as the recent good news from China.
Usually when the main buyer of raw materials in the world began a policy of stimulating large-scale investors interested immediately in markets such as Russia and Brazil. Both markets, however, are not only sensitive to changes in commodity prices, but they are at least as much dependent on the risk appetite of investors. And who wants to increase the risk of its portfolio when the first European banks begin to fall and that Berlin and Paris have not yet developed a credible solution?
