MacroscopeIndia and South Korea show emerging markets offer alternative to US, China economic doom and gloom

Many institutional investors believe emerging markets have the worst of both worlds. The US economy – particularly its resilient labour market – is too strong, forcing the Federal Reserve to keep interest rates at high levels and potentially necessitating additional tightening. This has driven up yields on US Treasury bonds, which has contributed to the steep rise in the US dollar and put emerging market assets under strain.

Developing economies are also having to contend with a loss of confidence in China’s economy as growth slows sharply and concerns intensify over Beijing’s reluctance to deploy aggressive fiscal stimulus measures to stop the rot in the property sector. With China accounting for about 30 per cent of the benchmark MSCI Emerging Market equity index and developing economies – especially commodity exporters – most exposed to the slowdown in China, the spillover effects are significant.

For an indication of the extent to which uncertainty over US monetary policy and China has undermined sentiment, look no further than the findings of Bank of America’s latest global fund manager survey, which was published on Tuesday. Respondents cited high inflation that keeps leading central banks hawkish as the biggest “tail risk” in markets, underscoring the lack of conviction among investors over the timing of rate cuts despite signs the US economy is slowing.

Just as worryingly, China’s property sector supplanted US real estate – in particular the vulnerable office market – as the most likely source for a “systemic credit event”.