Opinion | After Tencent’s profit slump, Chinese tech may trigger a bigger crisis in global markets than the Turkish lira

Nicholas Spiro says a Chinese tech-induced sell-off in the US stock market could do significantly more damage to broader sentiment than the Turkish currency crisis

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Tencent’s shock profit slump caused a sharper one-day fall in the MSCI Emerging Markets Index – the leading equity gauge for developing economies – than on the day Turkey’s currency crisis erupted. Photo: Bloomberg

Published: 3:45pm, 20 Aug 2018Updated: 10:38pm, 20 Aug 2018

For currency investors, there is little doubt about the source of the latest shock to roil markets. The collapse of the Turkish lira, which at one point last week was down more than 40 per cent against the US dollar, is seen as the chief problem, putting further strain on other emerging market currencies and raising fears of financial contagion.

Yet in the equity markets of developing economies, a different narrative was driving investor sentiment last week, one with significantly more potential to influence the direction of the all-important US stock market which, as I explained in an earlier column, has outperformed rival markets this year in spectacular fashion.

Last Wednesday, Tencent Holdings, China’s technology giant and one of the world’s top 10 companies by market value, stunned investors when it reported its first drop in profits in more than a decade as its online gaming division – which accounts for over a third of the firm’s revenues – faced a regulatory freeze on new game approvals.

Tencent’s shock profit slump caused a sharper one-day fall in the MSCI Emerging Markets Index – the leading equity gauge for developing economies – than on the day Turkey’s currency crisis erupted.

The greater sensitivity of emerging market equity investors to Tencent’s travails stems from the composition of the benchmark index.