Confidence Contagion: How Will Emerging Markets Be Effected?

27th October 2011

It is not news to say that emerging markets are facing a different outlook, but are they also vulnerable to the gloomy mood?

Self-Perpetuating Sentiment

Everyone is grimly aware of the extent to which weak sentiment is self-perpetuating. If enough people believe that a French bank will go bust, it may well go bust simply because its credit lines will dry up, other banks will refuse to trade and it will no longer have a business.

The same is true in the economy – if enough people believe in recession, consumer and business sentiment drops and it becomes self-fulfilling. It could have profound repercussions, therefore, if those countries that are the agents of world growth –China, Brazil and India in particular –succumb to the prevailing misery.

Measuring Sentiment

Perhaps the most obvious way to measure this is through business and consumer sentiment indicators. For example, on these measures, there does not appear to be too much to worry about in Latin America. Brazil’s business confidence indicators are steady and consumer confidence is rising. 

China’s business confidence is strong. This is confirmed by a recent improvement in PMI numbers.

Qu Hongbin, China economist at HSBC is quoted as saying: "Thanks to the pick-up in new orders and output, the headline flash PMI rebounded back into expansionary territory during October, marking a steady start to manufacturing activities in the four quarter.”

“Meanwhile, inflation components within the PMI results confirmed stable output prices growth and slower input price inflation. All these data confirm our view that there is no risk of a hard landing in China."

Corporate Activity

Equally, corporate activity still seems to be thriving, in spite of the relatively lacklustre performance of the stock market. This survey by PWC shows that M&A activity continues to power ahead.

The report says: “In fact, M&A in the industrial and consumer segments nearly doubled in the first half of 2011 compared to the same period in 2010. PwC Greater China Private Equity Group Leader David Brown said as production of China goods continued to move up the value chain and the country transitioned to a consumer-led economy, it was no surprise that buyers from China were keen to acquire more industrial know-how, technology and brands. China is hungrier than ever for good deals abroad.”

However, a lot has been premised on the increasing strength of the Chinese consumer and consumer stocks within China have attracted high ratings. With that in mind, the weakening consumer confidence figures are more worrying.

India shows the reverse, with its consumer confidence strong and its business confidence weakening.

For completeness, here are the figures for Russia.

Opportunities for Emerging Markets?

Can any conclusions be drawn from this data? Certainly, the business sectors are looking reasonably robust. Chris Palmer, manager of the Henderson Emerging Market Opportunities fund, says that a number of emerging market companies have been beneficiaries of the crisis: “Some emerging market companies noticed that the US and European consumer would probably not have a lot of money and took advantage. Kia cars from Korea are a good example. European companies often didn’t spot the declining purchasing power of consumers.”

Palmer says that – in a tribute to the relatively robust sentiment – some developed market companies are now attempting to reinvent themselves as Asian companies. Prada, for example, listed in Hong Kong rather than its native Europe.

But it is not immune to the global crisis – 11% increase in industrial output may look punchy to Western policymakers but it represents a slowdown for the Chinese.

What does this mean for the consumer?

Also, the consumer figures are troubling. Consumers are more vulnerable to global economic sentiment and may be more skittish and short-term in their outlook, but confidence in Brazil and India – where there are worries over credit expansion – and weakness in China – where everyone is relying on the emergence of a strong consumer, is not how economists might have planned it.

There may be a divergence between consumer and business sentiment in developed and emerging markets, but that does not mean that emerging markets are cheerily oblivious or unconcerned about the crisis in Western economies. The economic order may be changing, but it is not there yet and in the meantime, the UK, US and Europe represent some of the biggest markets in the world.

More from Mindful Money:

Eurozone Debt Crisis: LIVE

Does the Eurozone crisis matter to emerging markets?

New Global Titans: Stock-picking to benefit from emerging market success

Creativity and financial crisis: Will this provide the answers?

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