Emerging markets debt: still in favour?
Are August’s emerging market outflows a sign of things to come?
The US Federal Reserve (Fed) meeting is easily the most important event for the market next week. While a 25 basis points cut is almost certain, it will be the tone of the ensuing press conference that matters the most. We believe that the Fed’s next move, after July’s cut, will be data dependent. For this reason, we would pay attention to the September regional Federal Reserve manufacturing activity surveys in New York and Philadelphia, both published next week.
After the recent weakness in the Institute for Supply Management data, we would look for a slight rebound in those two indices as US-China trade tensions have been easing lately.
Related to the trade tensions topic, watch out for how this impacted China’s industrial output in August. We would not be surprised to see further weakness there, but what matters most in our view is the retail sales numbers. With the Chinese economy accelerating its rebalancing from export-driven to consumer-driven, a rebound in the retail sales number from last month’s would be a welcome sign.
Finally, data on UK consumer prices is expected to be strong after last week’s numbers suggesting that wage growth reached 4% year on year. This bodes well for August’s retail sales, released next week. With inflation numbers also likely to be in line with the Bank of England’s target, the central bank is set to be on hold until Brexit’s outcome becomes clearer.
China’s central bank cut the reserve ratio requirement (RRR) by 50 basis points (bps) for all banks and 100bps for smaller banks on 6 September. The policy shift released 900 billion yuan of liquidity into the banking system. By freeing up capital and allowing banks to increase lending, Chinese authorities hope to boost economic growth at a time when trade-related uncertainties have started to take their toll.
While the relaxing of the RRR is a step in the right direction, we believe that the action is no substitute for interest rate cuts or other quantitative easing measures to promote credit creation. Indeed, although RRR cuts tend to lower the short-term funding costs, they have shown their limits in influencing long-term borrowing costs and promoting credit demand.
For this reason, we believe that additional cuts are likely in the medium-term lending facility (MLF) rates - possibly around the next US Federal Reserve rate cut, likely next week - and in the benchmark deposit rate shortly after that. But still, we believe that the Chinese authorities may be reluctant to embark in significant monetary policy easing as the domestic property market is showing signs of overheating. Instead, we think that China will focus incrementally on fiscal stimulus.
The country has already given local governments the green light to issue special bonds to support infrastructure projects and we expect more targeted measures to be announced in the coming months. While China’s growth is undoubtedly slowing, we remain convinced that the country can engineer a “soft leading” thanks to continued monetary and fiscal support. This is why we believe that Asia ex-Japan equities in general, and Chinese equities in particular, offer an attractive, long-term investment opportunity.
Are August’s emerging market outflows a sign of things to come?
What can investors do to limit climate risk and spot investment opportunities?
This document has been issued by the Investments division at Barclays Private Banking and Overseas Services (“PBOS”) division and is not a product of the Barclays Research department. Any views expressed may differ from those of Barclays Research. All opinions and estimates included in this document constitute our judgment as of the date of the document and may be subject to change without notice. No representation is made as to the accuracy of the assumptions made within, or completeness of, any modeling, scenario analysis or back-testing.
Barclays is not responsible for information stated to be obtained or derived from third party sources or statistical services, and we do not guarantee the information’s accuracy which may be incomplete or condensed.
This document has been prepared for information purposes only and does not constitute a prospectus, an offer, invitation or solicitation to buy or sell securities and is not intended to provide the sole basis for any evaluation of the securities or any other instrument, which may be discussed in it.
Any offer or entry into any transaction requires Barclays’ subsequent formal agreement which will be subject to internal approvals and execution of binding transaction documents. Any past or simulated past performance including back-testing, modeling or scenario analysis contained herein does not predict and is no indication as to future performance. The value of any investment may also fluctuate as a result of market changes.
Neither Barclays, its affiliates nor any of its directors, officers, employees, representatives or agents, accepts any liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this communication or its contents or reliance on the information contained herein, except to the extent this would be prohibited by law or regulation..
This document and the information contained herein may only be distributed and published in jurisdictions in which such distribution and publication is permitted. You may not distribute this document, in whole or part, without our prior, express written permission. Law or regulation in certain countries may restrict the manner of distribution of this document and persons who come into possession of this document are required to inform themselves of and observe such restrictions.
The contents herein do not constitute investment, legal, tax, accounting or other advice. You should consider your own financial situation, objectives and needs, and conduct your own independent investigation and assessment of the contents of this document, including obtaining investment, legal, tax, accounting and such other advice as you consider necessary or appropriate, before making any investment or other decision.
THIS COMMUNICATION IS PROVIDED FOR INFORMATION PURPOSES ONLY AND IS SUBJECT TO CHANGE. IT IS INDICATIVE ONLY AND IS NOT BINDING.