Emerging markets may see more pain in 2016 after horrid 2015

PUBLISHED : Friday, 25 December, 2015, 10:31am
UPDATED : Friday, 25 December, 2015, 10:31am

Emerging markets have been hammered in 2015, as commodities plunged and local growth slowed, but analysts say next year might be no better for the world’s economic powerhouses - it might even be worse.

From China, to Brazil, to India, currencies have dropped, growth has sputtered and political turmoil has slowed down potential gains in their economies.

Stimulus can, of course, be ramped up further (in China), but given how much stimulus we have seen this year, it is unlikely this will be enough to deliver acceleration in growth
Schroders chief economist Keith Wade

According to the MSCI Emerging Markets Index, up to November 30th, emerging markets had seen a drop of almost 13 per cent, with some of their worst results in seven years.

“We believe this year developed markets will outperform the emerging markets,” Equity Asia Pacific chief investment officer Raymond Chan said.

“That’s what we’ve been seeing in Asia... Japan’s done pretty well compared to the core Asian markets. [Meanwhile] the US economy is performing and is delivering around two per cent GDP growth."

While emerging markets have been down, MSCI measures for Japan and the United States have been up as much as 11 per cent.

As commodity prices fell off a cliff in early 2015, emerging markets were left without an important lifeline. Oil prices never recovered from a drop in January of more than US$50 a barrel, while agricultural products have been on a steady decline.

Problems grew so severe that the International Monetary Fund downgraded global growth forecasts in October after weak commodity prices hamstrung growth in emerging markets.

Given their weak performance in 2015, emerging markets might be hoping for a rosier outlook going into 2016, but analysts say it could be a slow road to recovery for the major global players.

Chan said overall he expected the stagnation in Asia markets to continue into 2016, as domestic debt grows and China’s economic growth continued to falter.

“We still continue to see slower growth for China... [although] there are still a lot of policy tools China can use to maintain growth,” he said.

Schroders chief economist Keith Wade said they expected China’s growth to drop decisively in the coming year before levelling off going into 2017.

“Stimulus can, of course, be ramped up further, but given how much stimulus we have seen this year, it is unlikely this will be enough to deliver acceleration in growth,” he said.

Wade said China’s currency continued to be overvalued by as much as 20 per cent, leaving the possibility of a serious currency devaluation on the horizon in 2016.

Credit Suisse head of China research said in report on the outlook for 2016 there were multiple factors in the Chinese economy which presented a concerning picture going forward.

“The huge problem of excess capacity in the manufacturing [and] mining sector has limited room for industrial investment,” the report said.

“Property investment growth will likely turn negative in 2016 with the depressing tier two and three city property market. A weak global economy will also dampen any export recovery.”

But despite China’s prominence and importance in the global economy, the country’s slow decline hasn’t been the only factor in an emerging market slump heading into 2016.

Chan said while he had previously been bullish on India’s prospects because of prime minister Modi’s reforms, recent developments had changed his mind.

“The last couples of quarters there hasn’t been much progress on the reform front. India may not be doing as well as people expected,” he said.

Conversely, Wade said while Schroders had downgraded the outlook for India they still expected it to be a bright spot among emerging markets.

“One encouraging development was the policy announcement for gas price liberalisation,” he said. “This will greatly improve the incentives for natural gas investment. Though the immediate economic impact will be limited, it strengthens the medium-term outlook but, more importantly, reassures that the government remains committed to liberalising and reforming India’s economy.”

Not so lucky for Brazil - chief Asia economist at BNP Paribas Richard Iley said they were pessimistic about the country’s growth heading into 2016.

“Most emerging markets, while gorging themselves on the macro buffet of high commodity prices and elevated export earnings, eschewed the structural reforms that would have left them better placed when time was called on the party,” he said. “Brazil is the obvious poster child.”

Wade said in South America, Brazil was expected to have a disappointing 2016, with no recovery in sight until 2017.

“The political situation all but guarantees a lack of productive legislation until a new government comes to power,” he said. “This means investment and consumption decisions are likely to be deferred.”