Last week, worries about a slowdown in China’s economy and a credit crunch in the country spread to Latin America and other emerging countries, causing a big selloff across the globe. In the U.S. the biggest decline came in industrials and materials, sectors that have a lot of exposure to emerging markets.
So, is the issue overstated, or should investors expect trouble ahead?
David Gordon, chairman and head of research at the Eurasia Group, thinks China is a small factor in the selloff.
“The worst cases here are quite country- specific, and even on China, I think to the extent that China was the spark in the last 36 hours, I think it’s overstated,” he said. “I don’t see this as the severe downturn that some people in the markets are pricing in.”
Mounting economic worries in countries like Turkey and Argentina are a big part of investors’ concerns. But, Mark Luschini, chief investment strategist at Janney Montgomery Scott, says these small emerging markets’ economic dependence on China is the root of the problem. “China has been deliberately attempting to engineer a slowdown in this economy,” he said. “As a consequence, it has already had a backlash effect on so many other emerging market countries that are today are much more reliant on exporting amongst themselves and particularly to China.” Individually, Luschini doesn’t see these countries as a cause for concern.
This week, investors will watch closely how Federal Reserve policymakers will digest this global selloff and whether or not it will impact economic policy. Although Gordon doesn’t think the selloff will pose a huge threat, he does think continued market volatility could weigh on policy.
Investors are also wondering whether or not it’s time to get out of emerging markets on worries that these problems could explode into a full crisis. Luschini says that although this problem is taking a toll on the markets, the issues aren’t new and he believes there could still be more pain to come.