Recent data suggests the clouds are gathering over global stock markets as growth in emerging markets looks less and less likely in 2015.
Last year, investors pulled billions of dollars out of emerging markets after the Federal Reserve raised the idea of reducing its stimulus program. Governments in emerging markets responded by raising interest rates, encouraging investors to keep their money where it was an FT article reports, but although the markets subsequently staged something of a recovery, they have recently looked even more vulnerable. This month, investors removed $9 billion from stocks and shares across Africa, Latin America, Eastern Europe and Asia on fears of slowing growth in China and unwinding of monetary stimulus in the US, the FT suggests.
China is key to this loss of investor confidence. A Telegraph article reports that China is expected to be the largest economy showing growth next year with almost $1 trillion of global GDP growth in 2015. Combined with the US, the two countries are estimated to generate more than 90% of growth. In stark contrast, the next largest contributor is the UK with less than $200 billion, but in the UK the number of UK companies issuing profit warnings in the third quarter has reached the highest total since the 2008 banking crisis, calling into doubt even the UK’s growth prospects.
In China, several multinationals have issued profit warnings of late, notably Unilever is detailed by the paper as saying sales growth had slumped to about 2% during the nine months ended September, down from about 8% growth last year. The slowdown in Chinese sales growth to about 2% is also an average, the paper says – there are pockets where trading is far worse. Unilever added that sales to the big hypermarkets in the country are less than 2% or even negative in some cases. Meanwhile Nestle, the world’s largest food company, recently reported falling sales for the first 9 months of the year in China.
Does this matter? It does if Chinese growth is the answer, as Beijing tries to guide the economy more towards consumption and away from investment to achieve growth. The Chinese consumer is failing to respond. In 2009, after the 2008 banking crisis, China launched the largest stimulus package and infrastructure investment program the world has ever seen. The article states that China consumed 6.6 gigatons of cement in the last 3 years compared to just 4.5 gigatons the USA has used in the last 100 years, the world has never seen and is unlikely to ever see again investment on that scale, the impact was profound but is now tailing off. If consumers don’t step in as investment slows, growth will grind to a halt.
The loss in consumer confidence has much to do with the housing market. Chinese house prices in September fell again for the fifth straight month in a row and wiped away all the gains of last year. The paper reports house prices across 70 major Chinese cities declined by 1.3% in September from a year earlier. The housing correction is widespread, with prices falling month-on-month in a record 69 out of 70 major cities. Just as in western markets when house prices rise, consumers feel more confident and are willing to spend, when they fall the reverse happens and consumers pull in their horns.
For now, western investors appear rather sanguine following early October’s scare that saw billions wiped off shares. Markets have largely recovered in the US and made a partial recovery in Europe, but outside of the US there is not much to cheer investors in shares or commodities. Without growth neither look like hot prospects for 2015.