A Thai investor considers his options in a stock broker's office in central Bangkok. Photo: Reuters, Athit Perawongmetha

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