No doubt you’ve read your fair share of commentary on China and other developing economies in recent days, with plenty of comparisons to the 1997 Asian financial crisis.
Still, before you start panicking, Richard Titherington, JP Morgan Asset Management’s CIO for emerging markets and Asia Pacific equities, stresses that while a comparison with the 1990s is a valid one, it is worth remembering that there are more safety valves in the system today.
He points out that overall levels of foreign currency debt are lower as a percentage of GDP than they were in the 1990s, while currencies are generally freely floating.
“The one great exception and arguably the epicentre for emerging markets is China, hence the nerves you saw at the devaluation,” he says.
“It’s right for investors to keep a close eye on China as a bellwether.”
He adds: “The period of the 1990s saw a rising dollar environment like we had today, that always puts emerging markets under pressure. Then we went to 1.5x price-to-book because you had exchange rates that were broken. Now we have floating exchange rates, so we won’t see the same level of crisis.”
Still, as Titherington makes clear, in order for a catalyst for a turn in emerging market sentiment we will need to see changes in the real economy, not just markets being cheap. After all, they could get cheaper.
He remarks: “I’ve been saying you need three things: currency stability, at least a stabilisation in the economic picture, preferably an improvement. Following on from those two things, then you need corporate earnings recovering.”
With this in mind, JP Morgan remains generally overweight China in its emerging market strategies, while also being positive on India.
