Emerging markets will not be immune to the impact of the global credit crisis and are likely to suffer heavy losses in the coming months, according to managing director of van Eyk Research, Stephen van Eyk.
“In my heart I’m expecting quite a significant fall in emerging market growth, particularly in China,” van Eyk said. “Emerging markets have done the best so far, but there’s been a slight decoupling.”
Emerging markets are set to suffer from a two-pronged attack, with reduced exports to leading economies combining with an internal profit squeeze as a result of rising wages. “So I reckon some of those companies in the Asian indexes aren’t going to be feeling so good over the next 12 months,” van Eyk said.
The researcher believes emerging markets growth will fall to single digits, with the potential for China’s growth to fall to 6 per cent.
“It could be a really scary proposition for people, with emerging markets being the last bastion of growth and the belief that the world won’t go into recession because China is growing so strongly. If emerging markets suddenly take a hit in their own right, then that could scare the market [into thinking] that maybe world growth is worse than they thought it was and the markets could come off. That’s the big question.”
But rather than sparking fear, van Eyk said investors could see this as a buying opportunity.
“I think there’s a lot of oomph there and [emerging markets] are on the ascendancy. Emerging markets are probably fully valued at the moment but over the long-term are probably going to give you the best returns, rather than the leading markets.”
And while the global investment focus is currently on the United States, other markets are also fighting serious battles.
“I think the surprise will be just how deep it is in Europe, rather than America,” van Eyk said, with high retrenchment levels and business closures in the UK a serious concern. “The 10 per cent retraction in the investment banks’ balance sheets is something we haven’t seen in such a short amount of time since the Great Depression in 1929.”
Van Eyk believes there could even be a turnaround in the US dollar when the full extent of the crisis is realised in Europe.
“I wouldn’t be surprised if eventually the US dollar rises relative to the European currencies and relative to the Australian dollar. Because they’ve dumped first and fast they’re actually getting an advantage out of that in terms of exports, and I wouldn’t be surprised if, when it really hits Europe, the US dollar rises,” van Eyk said.
While investors are likely to be hurt by volatility in global markets, there will be opportunities created for some.
“At the end of the day, [Australian] markets are the best value they’ve been since 1995, and internationally since 1991, so at least you’re talking from a point where, yes things could go wrong, but you’re also talking from a point where they are actually good value as well.”
