21 October 2016
Brazil's economy has yet to bottom out. Photo: Bloomberg
Brazil's economy has yet to bottom out. Photo: Bloomberg

Worst to come in emerging markets

Liftoff by the US Federal Reserve is very likely to occur this month, and the strength of the US dollar has led to capital outflows from emerging markets and depreciation in their currencies.

China’s economic growth is poised to tumble below 7 percent to 6 percent, as it needs more time to engineer an economic restructuring.

Most emerging markets generate most of their revenue from exports of resources or commodities.

Slower-than-expected growth in China has caught them off guard.

Brazil has been battered and has plunged into a recession.

Brazil’s gross domestic product slumped 4.5 percent in this year’s third quarter, the biggest slide since 1996.

The country has reported a contraction in its economy for three straight quarters.

Meanwhile, investment in Brazil plunged 15 percent, dropping for nine straight months.

The market is concerned that the worst has yet to occur in Brazil, since its economy has not bottomed out.

That will take some time, as China’s economy is undergoing a slow restructuring.

The most optimistic view is that Brazil’s economy may rebound in the second half of next year.

Meanwhile, leading funds in emerging markets are grappling with massive redemptions.

For example, Aberdeen Asset Management plc, Britain’s second-largest fund house, reported 10 billion pounds (US$15.15 billion) of redemptions in the second quarter.

Its assets under management slumped to 307 billion pounds at the end of June.

Its share price has dropped by around 25 percent in the first half of this year, owing to the negative impact from emerging markets and Asian markets.

Many sovereign wealth funds in the Middle East or oil-producing nations have been withdrawing money from asset managers because of the falling oil price.

For example, Saudi Arabia is now managing 10 percent of its portfolio on its own to save a huge amount of management fees.

In fact, many fund managers have failed to beat the benchmark, because of market volatility.

Sovereign wealth funds are not satisfied with their performance and chose to redeem their capital.

Also, these sovereign wealth funds need money to stimulate their domestic economies.

They have withdrawn at least US$19 billion from funds within the third quarter, data from eVestment shows.

The world’s largest fund manager, Blackrock Inc., reported redemptions of US$31 billion from sovereign funds.

Other leading fund houses, like Franklin Templeton Investments, are also struggling with capital redemptions.

As of Dec. 8, the four largest US financial stocks, excluding Goldman Sachs Inc., have posted rises from their peaks in 2007.

By contrast, Standard Chartered plc (02888.HK), which has big exposure to emerging markets, has slumped over 78 percent from its 2007 peak.

The banking sector is very sensitive to broad economic growth.

The divergent performance of financial stocks in the United States and Hong Kong demonstrates the difference in economic growth.

Many banks in Hong Kong have tapped into the mainland market in recent years, and they are lending more to mainland companies.

Banking stocks in Hong Kong more or less reflect the level of economic growth in China.

This article appeared in the Hong Kong Economic Journal on Dec. 10.

Translation by Julie Zhu

[Chinese version中文版]

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Founder and Managing Director of Pegasus Fund Managers Ltd.

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