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There has been a turnaround in investors’ mind-sets, from a negativity surrounding tapering - causing markets to oversell - to the view that tapering may have less of a chance, and that if it does happen in September, it will be gradual. The market was spooked by different factors which have cooled, helped by consistently positive numbers coming out of China.
This suggests the economic slowdown will not be a hard landing, and that things are stabilising, with Japan’s upward GDP revision, the confidence that Abenomics is working and a retreat in crude oil prices.
Investors chasing yields found the valuation of emerging market equities too attractive to resist after the sell-off in August. The MSCI Emerging Markets show the price earnings ratio as 11.4 slightly below its five-year average of 12.5.
Enthusiasm for Asian markets is also evident in currencies, with the Indian Rupee leading gains in the past week, with a 5.3% rebound to 63.8 to the US dollar. This is followed by the Indonesian Rupiah, up 1.7%, and the Philippine Peso, with gains of 1.3%. The currency appreciation in these countries might recover further if US-dollar weakness persists with the sell-off that has made headlines limited for now.
We are cautiously optimistic, and we view this run up in emerging-market equities as the bounce coming off from a low base. The first couple of positive numbers coming out of China were met with disbelief by the market. Yesterday’s numbers were met with enthusiasm, perforating into other equity bourses. This is purely based on the market catching up with the notion that the situation in China will not crimp global growth.
In the bigger picture, although the focus is on China reaching 7.5% growth this year, next year’s growth target is most likely slower, at 7%, as indicated by Chinese officials. The US JOLTS yesterday indicated job openings fell in July.
After the disappointing NFP data last week, it is clear the labour market in the US will be on an uneven path.