In a report Wednesday, UBS analysts took a look at the effect Chinese tightening will have on world markets. Despite indications from metals prices that things are slowing down in China, volatility in US equities is near a 25 year low. Why does there seem to be a weaker relationship between the Chinese cycle and global financial conditions?
- China has shored up its currency with capital controls, which substantially diminishes the risk a Chinese slowdown poses to global financial conditions
- Biggest contributor to DM and EM stocks since President Trump’s election has been in the IT sector, with robust returns in the sector making up for weakness in commodities
- Asian tech cycle may be due for a pause after a strong performance; a drop in prices for more commoditized parts of the tech sector such as memory could lead to lower Asian export values
- If China’s domestic assets such as housing stop reflating under a tightening regulatory environment, Chinese investors will turn to foreign assets, once again putting pressure on the yuan
- A rally in the US dollar would, of course, also bring back worries about yuan depreciation
- Expect EM equities, especially in Asia, to outperform DM for the first half of the year
- Local rates represent best choice in EM asset spectrum
- EM equity trade will likely give way before the bond trade does