Performance of Emerging markets during 2015

China’s economy showed some signs of stabilisation during the period and this helped its stock market make gains after a particularly turbulent third quarter. The stabilisation occurred amid significant government policy support in the form of currency intervention, interest rate cuts, increases in fiscal spending and reductions of the bank reserve requirement ratio (the proportion of capital that China’s banks are required to hold on their balance sheet, rather than lend out) (Figure 1).

Figure 1: Despite the fact that considerable stimulus has already been provided to the Chinese economy, there remains significant scope for further support. Interest rates are high compared to the other major economies, the bank reserve requirement ratio is far above historical levels and the government’s financial power is huge (as measured by its foreign exchange reserves). (Source: Thomson Reuters Datastream)

Although the growth rate of China’s manufacturing sector continues to slow, that of its service sector remains robust. Services now account for a larger portion of China’s economy than manufacturing and the divergence in each sector’s growth rate over the last couple of years can be somewhat attributed to the government’s desire to rebalance the economy and contain the imbalances in its construction sector (Figure 2).

Figure 2: The growth rates of China’s service and manufacturing sectors (as measured by secondary and tertiary gross domestic product data) have decoupled in recent years.

(Source: Thomson Reuters Datastream)

Although China is showing some signs of stabilisation, the broader performance of the Emerging Markets region continues to be weighed down by lower commodity and oil prices. This is particularly true of the Latin American countries (Figure 3).

It should be noted that Emerging Market investments exposed to attractive long-term themes, such as increasing consumption, have performed relatively well. In any case, the aggregate performance of the Emerging Markets is likely to continue to be driven by energy and commodity prices.

Figure 3: Emerging market equities have been the poorest performers in 2015, in regional terms. Within this, Latin America has been the clear laggard as a result of its heavy resource exposure and other structural issues, such as high inflation in countries like Brazil.

(Source: Thomson Reuters Datastream)

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