There have been technological challenges in China, technology stocks getting beaten up and now the bounce back; emerging markets (EMs) have got a step-brotherly treatment. More money is going into developed markets (DMs), emerging market (EM) economy growth seems to be under a bit of a challenge because of the delta variant taking hold at this juncture and lockdowns being reported in many countries. Speaking in an interview with CNBC-TV18, Jahangir Aziz, Head-Emerging Markets, JPMorgan, shared his views on where the emerging market is.
“China was the first in, first out (of COVID) economy. So, by the time we get into December, China will have fully recovered on the manufacturing side. Services clearly is something that we were looking for a recovery in 2021, but when policymakers started the year, they had a very strong global growth which through exports was going to support their growth rates and in 2020, they had provided a massive amount of credit support, which had increased China’s one big concern that we all have, which is leverage,” he said.
“Because of all of this, I think the Chinese authorities took the approach that they don’t need to provide same amount of support to the economy in 2021. Both on the macro front and on the regulatory front, it is not just technology stocks – prior to the technology stocks, it was the real estate sector that saw significant tightening taking place,” he added.
According to him, China has been affecting global commodities mostly on the metals complex rather than on the oil complex.
“China is not the major driver of oil in the industry. However, in metals, China has been - for a very long time - the largest marginal driver of copper and it continues to be. However, sometime around December of last year, probably related to the US elections, you saw a breakaway in metals demand – metals demand was no longer being driven primarily by Chinese credit flows or Chinese demand but was being driven by this view of inflation hedging. That concern started to emerge from the market. Much of the price movement that you have seen in commodities particularly in metals over the last six-seven months has clearly not been driven by anything that is happening in China because if that was the case then metal prices should have nosedived instead it has been driven by inflation hedging and there it is a different call,” he explained.
He believes there is a divergence now in the commodities field particularly in metals where Chinese demand has become far less influential as a driver and influential hedging has taken over as the bigger driver of metals.
“I would wait and see how global inflation plays up, particularly US inflation plays up and how that affects inflation regime, going forward,” he said.
According to him, smart money is preferring developed markets over emerging markets for some time. “That has been the basis – not just smart money but even passive money in the last six-seven months. The manner in which different countries have reacted to the pandemic is one that has been differentiating. Before the delta variant happened, if you look at the vaccination, it was not a central part of any of the EM countries’ pandemic strategies. It was only of the DM countries, which thought that vaccination was the principal way to counter the pandemic. Instead, Asian emerging markets tended to rely much more on lockdowns as a way of handling pandemic. What the second wave of COVID-19 has shown is that lockdowns per se is not a solution to your problems, you have to get vaccination as part of your strategy. Asia is the place where we are worried and we are worried because Asia tends to use lockdowns,” he explained.
For the full interview, watch the accompanying video.