The risks to economies in Asia have “decidedly tilted to the downside”.
The International Monetary Fund lowered it forecast for Asian economies to 6.25% for this year, “in line with weaker economic growth”. And that’s because “although far from the epicenter of the crisis, Asia remains vulnerable to further trade and financial shocks given its high degree of integration”.
Last month China’s trade surplus narrowed 12.4% to $14.5 billion, the second monthly decline. And with that exports slowed to a seven month low of 17.1% annually. The news was accompanied by a warning of “severe” challenges to the global economy from the customs bureau, and only heightened global economic concerns.
But worries about China are a bit overdone. First of all, the narrowing trade surplus is attributable, in part, to a strengthening currency (the yuan gained 4.3% against the euro since the beginning of August…and Europe is China’s largest export market). And the markets appear to be pricing in a more severe downturn than we are likely to see.
China will report third quarter GDP this week…and it is widely anticipated that the country’s growth slowed to 9.3% (which is nothing to scoff at compared to our 2nd quarter growth of 1.3%). And looking at China compared with other Asian countries, real economic growth has been fairly stable this year.
Even with the ‘slowdown’ in China, the outlook is good. This is a country with ample currency reserves, a government that responds quickly to economic developments and consumers that are ready, willing and able to spend. That means China has buffers to insulate it from further risks to the global economy. And that means the distress in the market will present opportunities there.
The MSCI Emerging Markets Index has fallen 31% from the high this year, bringing valuations to the lowest level since 2008. That means its time to start looking for buying opportunities. And with that, PIMCO is “selectively accumulating positions” in China simply because the markets are “very, very cheap”.
And looking at a proxy for Chinese equities, iShares FTSE China 25 Index Fund, shares recently bounced back from oversold levels. This is a fund I am watching for a buy signal once trends in the equity market suggest entering a position.