MacroscopeWhy the emerging market rally may run out of steam despite a strong start to the year

Nicholas Spiro says investors should pay attention to the slowdown in China’s economic growth, uncertainty over the outcome of trade negotiations and risks in US monetary policy before taking a bullish stance on developing economies

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A woman works at a textile factory in Xingtai in north China’s Hebei province in December. The IMF expects China’s economic growth to slow to 6.2 per cent in 2019. Photo: Xinhua

Published: 2:00pm, 24 Jan 2019Updated: 10:31pm, 24 Jan 2019

What a difference a year makes. At the start of last year’s World Economic Forum in Davos, Switzerland, the International Monetary Fund hailed what it called “the broadest synchronised global growth upsurge since 2010”. Yet this year’s outlook, which the IMF presented on Monday, is decidedly downbeat, warning of “softening momentum” and “high uncertainty” in the global economy stemming from a plethora of risks, ranging from the trade war to the threat of a sharper deterioration in market sentiment.

One of the dangers highlighted by the IMF is the possibility of a “deeper-than-envisaged slowdown in China” which could lead to a repeat of the turmoil in 2015-16 when fears about the world’s second-largest economy caused “abrupt, wide-reaching sell-offs in financial and commodity markets that place[d] its trading partners, commodity exporters and other emerging markets under pressure”.

On the same day that the IMF warned of the risk of another China-induced sell-off, the publication of official gross domestic product data for the final quarter of last year showed that China’s economy expanded at its weakest pace since 2009, dragging down the growth rate for the whole of 2018 to the lowest since 1990. The IMF expects the economy to slow more sharply in the coming years, decelerating to 6.2 per cent in 2019 and 2020.

While investors have become more sensitive to slowing growth over the past several months, China’s economic woes have not prevented a rally in emerging markets from gaining traction.

Since the end of October, the benchmark MSCI Emerging Market Index, the main gauge of stocks in developing economies, has risen more than 8 per cent, with the bulk of the gains occurring this year. Investors have also been pouring money into emerging market debt and equity funds which suffered a long spell of outflows last year. What is more, dollar-denominated bond sales in developing nations are enjoying their third-best start to the year on record, according to Dealogic, a data provider.