US pain can be EMs’ gain

By Shuli Ren / BLOOMBERG

Emerging markets (EMs) are reliving their 2015 nightmare. A US stock correction may be just the thing to rouse them.

Three years ago, developing countries’ stocks lost almost a quarter of their market value in the months from October to January.

China’s foreign reserves slid as Beijing scrambled to stem a flood of capital outflows. Meanwhile, a hurriedly implemented circuit breaker, intended to halt mainland A-shares’ decline, turned out to be futile.

Now we are seeing a similar slump, albeit at a slower place. US stocks, by comparison, have hardly seen a correction.

Recurring Nightmare
EMs’ 24% drop so far this year mirrors the slump of early 2016. The US market, by comparison, has hardly seen a correction.

The S&P 500 Index has benefitted from an “America First” mentality. The US Federal Reserve (Fed) is on track to hike rates four times this year, followed by two more in 2019.

The US$3.5 trillion (RM14.35 trillion) of easy money unleashed by the US central bank’s quantitative-easing programme, a good chunk of which went toward higher yields in EMs, are now poised to come home.

With all signs pointing higher, stocks seemed like an obvious place to put your money.

So, this pause in the S&P’s record bull run — even if it’s brief — could be just the thing to slow developing nations’ outflows.

Some pockets of the EM sell-off are looking increasingly irrational, anyway.

After Bloomberg Businessweek reported last week that China used a tiny chip to infiltrate US servers, a new twist to the escalating trade war, investors dumped Chinese hardware makers — so much so that it seems they no longer expect China Inc to generate any overseas sales at all.

Personal-computer maker Lenovo Group Ltd, which gets 17% of its profit from the US, has lost almost a quarter of its value.

Similarly, surveillance-camera maker Hangzhou Hikvision Digital Technology Co tumbled 17% over the same period, despite negligible sales in the US.

In the event of a “total trade war” — in which the US would stop buying all Chinese-branded electronics, and Beijing would reciprocate — American brands stand to lose US$43 billion a year, 2.7 times China’s loss, according to CLSA.

If the sell-off deepens, it should really be on US soil.

During last week’s roadshow for its dollar-bond sale, China’s Ministry of Finance painstakingly pointed out that many US multinationals — including Apple Inc, Tesla Inc, Starbucks Corp and Boeing Co — get a sizeable chunk of their sales from the mainland.

That amounts to a thinly veiled threat: Beijing has the leverage to cause a serious correction in US stocks.

Veiled Threat
In a total trade war, China could put a serious dent into US multinationals’ earnings.

As I argued recently, valuation premium between the US and EMs has reached a historical peak.

Developing economies may not be playing catch-up now — because liquidity there is still tight — but it’s high time for US stocks to come back down to earth.

Tide Out
Financial conditions in the US, a good indicator of stock-market performance, tightened sharply in October.

And that’s not necessarily a bad thing. Stubbornly persistent outperformance of one market could spell trouble as the world’s most prominent central bank continues to mop easy money off the floor. We are now in a zero-sum game.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its