China's soft landing next year means volatility for emerging markets (EM), but seasoned investors could capture hidden opportunities, said BlackRock Inc, the world's largest asset manager.
The BlackRock Investment Institute said in a Thursday report that its base case for China is a soft economic landing. China is likely to undershoot its current five-year annual real growth target of 6.5 percent, but that is not the end of the world. Even real GDP growth of 5 percent would be healthy for a roughly $10 trillion economy.
"Nowhere do China's economic shifts reverberate more than in the emerging world, as the EM and trade booms have relied heavily on Chinese demand," said Chris Hall, Co-head of Asian Equity Research at BlackRock. "EM countries reliant on Chinese demand and commodity exporters such as Australia now face a double whammy, in that China's growth has fallen further and faster than expected and the composition of the growth is changing fast, from demand for natural resources to an appetite for consumer goods, services and dairy products."
"Furthermore, considerable refinancing of local government debt by the central government in China has lowered debt costs considerably," added Hall.
Yet, the institute believes investors would be prudent to recognize cyclical swings that could help propel the EM equity markets higher, at least temporarily. Such forces include global growth edging higher; significant depreciation in many EM currencies; easing inflation next year in some countries, and the oil price collapse, a boon for oil-importing nations.
Overall, the institute counsels investors to pay much more attention in 2016 to the business, credit and valuation cycles, as the impact of the monetary policy cycle fades.
