The week-long National Congress of the Chinese Communist Party, which opens tomorrow in Beijing, is among the main events and trends that bear watching this month for their impact on emerging markets.
The Congress is widely expected to reappoint Xi Jinping as party general secretary and president for a new term of five years. It will also appoint a new premier, as Li Keqiang is stepping down.
But from an investor's perspective, attention will focus on policy measures after the Congress concludes. It is believed that more substantial policies to stimulate growth have been held back until Mr Xi is reappointed.
While investors will likely welcome more aggressive policy easing, it is taking place against a backdrop of slowing global growth, weak domestic consumption due to China's zero-Covid policies and US lawmakers' hawkish stance towards access to key technologies that China needs to accelerate growth. While China still has policy levers to pull, the global backdrop could dilute their impact.
Turning to Brazil, the first round of presidential elections produced no single candidate with more than 50% of the vote, which means the two candidates with the highest share of the vote will progress to a second round on Oct 30. Incumbent Jair Bolsonaro will face rival Luiz Inacio Lula da Silva in the runoff.
Investors should look beyond the elections and focus on market-friendly developments in the coming 12 months. The potential for interest rate cuts in 2023 stands out given that Brazil's central bank hiked rates ahead of most peers globally, and inflation may have recently peaked.
Meanwhile, oil prices have been declining steadily since their peak on March 8 following Russia's invasion of Ukraine. But at an average of $98.10 for the year-to-date, West Texas Intermediate crude is still up 31% from the year before. Tight refinery capacity and a post-pandemic recovery in demand has also pushed prices of refined products, including petrol, diesel and kerosene even higher, with a commensurate impact on inflation.
Looking ahead, the decision by Opec+ to cut output may support prices in the short term. However, with a global recession looking increasingly likely in 2023, it is difficult to see oil prices remaining elevated for a prolonged period. This has positive implications for inflation, although other drivers such as elevated food prices are more important for emerging market inflation.
EMERGING MARKETS OUTLOOK
As inflation has spiked higher, central banks have been accused of being asleep at the wheel. While the shift from easier polices during the pandemic to tighter polices in a supply chain-constrained world may have taken place slower than required, there is no doubt that central banks have fully reasserted their inflation-fighting credentials.
The US Federal Reserve has raised rates five times this year, by a cumulative 325 basis points, with more expected. Inflation in the eurozone rose to a record 10% in September, which is likely to lead the European Central Bank to hike further. There have been fewer interest rate hikes in emerging markets than in developed markets, reflecting more subdued inflationary pressures, helped in part by energy price subsidies.
Using real interest rates as a proxy for the monetary policy stance, markets such as Brazil are experiencing tight policy, whereas policy in the US and eurozone area remain loose. This has implications for the timing of eventual rate cuts, with Brazil likely to join China in cutting rates in 2023.
In isolation, this is would be positive for investors. However, we acknowledge the challenging global backdrop and the need to see an improvement in global growth and/or a weaker US dollar to enable the positive impact of lower interest rates to filter through to asset markets in these countries.
The Chinese property market, meanwhile, continues to struggle, which has affected domestic growth as well as demand for key commodities involved in construction, including cement and steel. According to the World Cement Association, global cement output fell by 8% in the first half of 2022, led by a 15% drop in China.
A 40% decline in new real estate construction starts, as well as single-digit growth in infrastructure investment, have contributed to the weakness in cement demand and, in turn, output.
While the Chinese government has encouraged regional leaders to boost investment, its zero-Covid policy is viewed as the priority. But given the importance of real estate to the economy, the government recently announced three policies to stimulate the sector, including removal of the floor on mortgage rates for first-time borrowers, an income tax refund if the new property purchase takes place within one year of a prior sale, and a 15-basis-point cut in interest rates on Housing Provident Fund loans to 3.1%.
These polices are viewed as positive, but not transformative. Concern over the financial health of property developers, slower wage growth and double-digit youth unemployment is weighing on property demand.
Two of the three measures lower interest rates, but the cost of financing is not the primary issue -- it is confidence that matters. Once the National Congress concludes and there is clarity over roles for regional leaders, more aggressive policy measures may be forthcoming to boost confidence.
Sukumar Rajah is senior managing director and director of portfolio management with Franklin Templeton Emerging Markets Equity.
