Posted August 4, 2014 7:57 pm by Comments

James Donald, the manager of the £770m Lazard Emerging Markets fund, recently wrote a piece for FE Trustnet about why investors can now afford to be bullish on emerging market equities in general and why they should stop worrying about a financial crisis in China. In his article, Donald explained his belief that emerging market investors have largely priced in a scenario of a gradual rise in rates, but should US rates rise rapidly or do so sooner than expected, emerging market stocks could suffer a fate similar to the end of 2013 when the US Federal Reserve first announced its taper intentions.

But for those fearing problems in China, Donald observed:

China’s sovereign debt levels are by no means among the world’s highest. They are on par with the emerging region’s average and below that of most developed countries. However, China’s growth rate still exceeds that of any other country in the world, except India. That being said, slackening demand from China will be felt by the rest of the emerging region, but this should be largely offset by growth elsewhere in the world… From our perspective, today’s risk to Chinese growth is the increased leverage in China’s financial system.

He went on to say:

All things considered, a full-blown financial crisis in China is unlikely, in our view.

Although its credit challenges may invite comparisons to the recent credit crisis in the developed world, there are at least three crucial differences:

First, China has a closed capital account. This removes the risk of capital flight, which has been the undoing of troubled market economies in the past.

Second, China has amassed two-thirds of the world’s foreign reserves, which provides an extremely thick financial cushion should it need to pour money back into its economy.

Third, China has a centrally planned economy and the state is able to intervene directly and powerfully in capital reallocation and financial reform.

Finally, Donald commented that “misplaced fears have created compelling opportunities for our equity teams in a broad swath of sectors, including consumer discretionary and staples, energy, financials, industrials, and telecom services.”

To read the whole article, James Donald: Why the emerging markets rally will gather steam, go to the website of FE Trustnet.

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