Growth peaked in 2010 and slowed until last year and may now be in the early stages of a pick-up. At the beginning of last year the fear was of a China slowdown, now the sense is that its economy is recovering. India, too, is growing steadily. This has contributed to more positive sentiment towards the emerging markets.
Factoring in growth from China’s Belt Road while accepting future volatility
This leads into one area that I will feel people are coming to terms with: China's Belt Road Initiative. This includes large scale infrastructure spending, energy investment in markets along the route and other tie-ups across the globe. Quantifying the full impact is still difficult but essentially it is China going global. The Belt Road is three years in and, despite initial scepticism towards it - even in China - it is the President’s pet project and is so gaining greater traction: witness the recent summit in Beijing attended by 29 world leaders, despite a US-led boycott.
It is not something we can directly plug into but indirectly it plays to emerging economies, and even global firms in the UK and elsewhere that can leverage off this. To balance this longer-term positive, the near-term challenge for China is increased international awareness of its poor debt position, linked to its shadow banking sector and domestic credit growth. Overall, however, the Chinese economy is growing at a steady pace compared with worries about a sharp slowdown at the start of last year. As the IMF highlighted at its spring meeting in Washington, the debt situation in China warrants attention, although for now steady growth suggests this is a future worry rather than a current problem. For the Chinese economy, the trend is still up but there will be setbacks along the way.
UK risks have increased
The biggest challenge for investors is UK politics. There are multiple aspects of this we may wish to consider; a negative impact on economic activity, which may already be happening, judging from the Institute of Directors (IoD) survey last week, although we should remember there was a knee jerk reaction after last year's referendum too; political risk - an early election is still possible but the most likely outcome is that the Conservative Government struggles on, perhaps with a new Prime Minister; and international attitudes towards UK assets - again this may not change too much, but international investors hold around one half of UK equities one quarter of the UK commercial real estate market, over one quarter of gilts and around one half of UK equities.
The EU exit negotiations have now started, with the initial focus on the rights of EU citizens, the divorce settlement and Northern Ireland. Beyond that, markets may be sensitive to any perceived disagreement between the Chancellor and Prime Minister, which is hovering beneath the surface.
Add in the diverging views at the Bank of England we mentioned earlier and it points to a potentially more volatile time for UK assets.