Equities tumble in China, India, Dubai, Egypt as emerging markets correct
Posted on 17 January 2011 with 5 comments from readers
One of the New Year’s predictions from the ArabianMoney newsletter (click here to sign-up) seems to be coming right with the start of a big correction in emerging market equities, totally at odds with many optimistic forecasts a few weeks ago which we took as a contrarian indicator.
Rising property prices in China are sounding alarm bells about monetary tightening and the smart money is leaving stocks that fell 3.8 per cent today in Shanghai. Property stocks are the focus of selling as the ‘Dubai x1000 property boom’ cited by hedge fund legend Jim Chanos (who shorted US sub prime brilliantly, click here) will inevitably come to a sticky end.
Incredible India
In India higher interest rates are also expected as inflationary pressure on food prices is mounting. The hubris of its bourse is now exposed to the market forces of correction.
The Dubai bourse is suffering a crisis of confidence as more and more debt horror stories emerge from the woodwork. Credit Suisse recently came up with a new high for total state debt of $129 billion, topping the IMF’s $109 billion. Some insiders say Dubai will be in fighting form again by 2014, but that is three painful years away.
Egyptian stocks, on the other hand, are tumbling in the wake of the revolution in Tunisia with fears that the same pressures of unemployment and food price rises could bubble over into political unrest in Egypt.
Suddenly the idea of emerging markets as the boom asset class of 2011 looks a bit passe. Those jumping on this bandwagon for 2011 were just too late to the party. That said the correction could move these equity prices to levels that would be very attractive to many ArabianMoney newsletter readers and we will be on hand with fresh investment ideas then.
Global impact
The wider issue, of course, is whether the stock markets of Shanghai, Mumbai, Dubai and Cairo can exert a contagion effect on global bourses or commodity markets. Certainly $100 oil and the industrial commodities also look very vulnerable to a correction if the infrastructure construction bubbles of China and India are indeed popped.
Agriculture and precious metals might also be shaken by a correction, though not to the same extent. And naturally any serious disturbance to commodity prices would impact on global stock markets through the share prices of commodity producers.
Is this the start of something localized or more global for financial markets? In the interconnected world of global finance it would be hard not to conclude the latter.
5 Comments posted by readers:
There are few if any certainties in life,and one cannot buy security with money or gold.
Good friends, Family,Good health, and respect for others as well as for self, are still the only currency of real worth.
Farmers boy
I come from two broken homes, have you ever been so skint you think the roof over your children’s heads will be taken by the bank?
What you say is basically true however.
A technical point for picture editors everywhere: in China, red is the lucky colour, and stock market boards are coloured accordingly. The Chinese bloke in your picture is celebrating a day of rises across the board. Losses are marked in green. A tricky intercultural problem.
Also at question is the reliability of the Shanghai stock exchange as an indicator. As all the companies listed are state-owned, share-ramping is pretty much legal, and investors are basically gamblers, the connection between prices and the wider economy is often tenuous. Look at the indices for the last ten years.
Ed Note: On the red indicator it will be interesting to see which culture over powers the other – I think I can guess which will dominate.
Chinese New Years is coming up in China. Usually the month before Chinese New Years we see a run up. Most companies in China stop working on the 24th of this month. Due to a very hard and big crack down in China this month on all black market related businesses we will see a selloff in the markets. This is normal as the Chinese want cash for Chinese New Years. During the last week of work before Chinese New Years the Chinese stop buying and start cashing out for Chinese New Years. Right after Chinese New Years the Chinese are loaded with cash and resume buying. Commodity prices rise about 1-2 months before Chinese New Years and taper off during the last week or two before Chinese New Years as manufacturers stop buying these commodity items. Due to lack of demand prices of commodity items drop. Items like Sugar,copper,wheat,etc.. usually start dropping this week into Chinese New Years due to lack of demand.
The government employees get a percentage as a bonus for every business that they catch and fine before Chinese New Years. As an example this month they cracked down very hard on copyright items in Guangzhou. For every shop that they busted the fine was 50,000 RMB and for every factory that they busted the fine was 100,000 RMB. Due to everyone wanting cash before Chinese New Years the crack down was very hard and big in Guangzhou and Shenzhen this year. With fear in mind many people closed up early this year and also sold off their stock holdings.
Ed Question: so when do those Chinese buyers come back into the market?
@ED
About a week or so after the 2nd of February.