China
China’s apparent slowdown has obviously been a continuing theme that accounts for the reluctance of investors to return to emerging markets, but there remain signs of hope as the country continues to take steps to develop a large and efficient domestic bond market.
Jan Dehn, head of research at Ashmore, explains: “Ten local governments were given formal permission to begin to issue their own bonds.
“The local government administrations of Shanghai, Zhejiang, Guangdong, Shenzhen, Jiangsu, Shandong, Beijing, Qingdao, Ningxia, and Jiangxi will now issue bonds within quotas approved by the central government. The bonds are fixed coupon bonds with 5, 7 and 10 year maturities.
“The bond market is going to be the main transmission mechanism for monetary policy as the government shifts China’s growth model from an export-led to a domestic demand-led footing. Local government bond issuance is likely to grow rapidly in the future, increasingly replacing less transparent local government financing vehicles and bank loans.
“Transparent bond financing introduces market discipline to harness errant administrations by pushing up their borrowing costs. Bonds will also provide an important alternative asset to equities and property in the portfolios of China’s savers – as bonds will help to stabilise these savings pools over the business cycle they will reduce the precautionary savings motive and thereby help to boost domestic consumption.”
India
It is not just China where momentum is changing, with the recent election of Narendra Modi as prime minister and the appointment of a new finance minister in the form of Arun Jaitley, there is expectation that the change of government will result in reforms to India’s economy.
The latest GDP figures for India in Q1 were slightly below expectations at 4.6 per cent, which is the eighth quarter with less than 5 per cent growth. Craig Botham, emerging markets economist at Schroders, notes the figures emphasise the need for a policy overhaul from the new government.
He says: “The recent appointment of Arun Jaitley as finance minister is a positive sign, but there are no quick fixes to structural problems. All new appointees have made the right noises so far, but July’s budget is the first chance to offer real concrete commitments to reform. A reduction in subsidies would be a good start.”
Brazil and beyond
Elections are also a potential gamechanger in Brazil, which although it has performed positively in 2014 so far in terms of GDP growth remains below forecast with a Q1 figure of 1.9 per cent.
Mr Botham notes: “With investment also contracting 2 per cent year-on-year, the need for a change in policy is increasingly evident. Bottlenecks play a large role in driving Brazil’s inflation, now running close to the top of its target band, and it will be difficult to tackle without addressing supply side concerns.
