Friday, May 11, 2012

Trouble for Emerging--and Developed Markets?

The long-term case for emerging economies, their currencies, and their bond and stock markets has been compelling.  This has been reflected in excellent returns for their currencies, bonds, and stocks in recent years.  Faster economic growth, lower debt levels, and abundant natural resources are several reasons for long-term optimism compared to the developed economies.

But the Chinese economy--which has been a crucial source of demand for Europe and Brazil in particular--is slowing markedly.  Chinese economic reports have long been suspect, but even with an optimistic bias, challenges are appearing.  Chinese imports in April were basically flat, and exports grew only half as much as had been forecast.  A primary concern over the last few years was whether the rest of the world could satisfy China's voracious demand for raw materials and other commodities.  Warnings signs had been building, though, as China's fixed investment as a percent of its economy had significantly exceeded historical limits seen in other rapidly developing countries.  Now, with excess capacity in various sectors, demand for resources is slowing, along with economic output.

Though China and other emerging economies have worked to become less dependent on exports to Europe and the U.S., these regions still matter greatly.  And the economic struggles in Europe are now clearly affecting China (and the U.S., according to Cisco's quarterly results).

Unprecedented monetary policy expansion can still find its way to inflate market prices (note recent record prices for art and other assets).  But the economic underpinnings for stock markets are still not solid.

Steve Lehman

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