Emerging market (EM) equities sank to two-month lows yesterday as the latest stimulus measures from China disappointed investors and economic data out of the country has worsened, market analysts said yesterday.
The MSCI’s EM equities index fell 0.4% to mark its eighth consecutive day in the red yesterday, and it was the longest losing streak of the index since April 2022.
Investec chief economist Annabel Bishop said in a note yesterday that the rand had remained at very weak levels, near R19 per dollar over the past week, as it was negatively affected by the risk- averse global financial market environment, in particular concerns over China’s growth prospect.
"The global economy has seen its economic growth rate slow, and trade conditions have become defragmented, while geopolitical risks have resulted in Western countries wishing to diversify away from heavy trade dependence on China,“ she said.
Heavyweight shares in Shanghai and Hong Kong slumped more than 1%, with China’s blue-chip index hitting a nine-month low after the country’s central bank cut its one-year benchmark lending rate by a smaller-than-expected 10 basis points, and kept the five-year rate unchanged.
“At the current juncture, deeper rate cuts and RRR (reserve requirement ratio) cuts could be seen as concrete moves that are necessary to help restore confidence, even though they may not lead to stronger credit and economic growth soon,” Reuters cited Commerzbank strategist Ulrich Leuchtmann as saying in a note.
Anchor Capital CEO Peter Armitage said emerging market stocks were being driven lower by China’s unexpectedly weak recent economic data, as most investors had expected strong growth in the country after its Covid-19 restrictions were lifted.
Instead, consumer demand-related data, such as retail and motor vehicle sales, were well below market expectations, an indication that consumer confidence, already hurt from the tight Covid- 19 restrictions, the housing market collapse and rising regulatory restrictions, had soured in China, said Armitage.
Equally surprising was the relatively muted responses so far by the Chinese government in its efforts to stimulate consumer demand, said Armitage.
“Admittedly, the rate cuts will lead to larger interest rate differentials vis-a-vis the US and most major economies, posing further downward pressure on the CNY (Chinse Yuan Index) initially. However, should more forceful stimulus be seen as effective in putting a floor to economic growth, the pressure on the CNY could also be alleviated,” said Leuchtmann.
Schroders senior emerging markets economist David Rees said the latest batch of data out of China would have done little to calm fears about the health of China’s economy.
“An apparent collapse in domestic demand meant imports were far weaker than expected in July, while the economy slid into deflation last month as consumer prices fell by 0.3% compared to the same period a year earlier,” said Rees.
“This is in marked contrast to most other parts of the world where our regime shift work suggests that the risks to structural inflation and interest rates are skewed to the upside.”
Rees said, however, that while China’s economy was struggling and faces long-term challenges that will weigh on growth, the recent slide into deflation appeared to have more to do with the unwinding of past increases in global commodity prices, as it does weak domestic demand.
“If we are right, then the current bout of deflation is likely to last months rather than years,” said Rees.
Equities in central Europe and South Africa rebounded after losses last week, with the JSE All Share Index up 0.84% yesterday afternoon. The JSE All Share Index later closed 0.93% higher at 73 760 points.
Emerging market currencies have also come under pressure recently due to surging treasury yields and a stronger dollar following signs of resilience in the US economy and bets that borrowing costs there could remain elevated for longer.
BUSINESS REPORT