Will China Crackdown, Drop in Oil Price Have Impact on Emerging Market Rally?

A heated debate has burst over the latest drop in oil price and China crackdown on leverage.

However, the opinions are divided. Some consider these changes will have a negative impact on emerging markets, whereas others are not convinced.

Areca Capital CEO Danny Wang says that China’s restrictions on leverage would improve the fundamentals of its economy.

“(Despite the drop), oil price is still near the acceptable range so long as it does not hover too far from USD 50 per barrel. It may not affect the fundamentals of an economy too drastically and may just be a sentiment issue. Likewise, it is a sentiment issue on China leverage. Our data shows a gradual improvement of fundamentals in the Chinese economy – in Purchasing Managers’ Index (PMI), trade and exports,”  Wong underscores.

The Purchasing Managers’ Index is calculated based on new orders, production, employment environment, inventory levels etc. It is a strong indicator of the health of an economy.

Investors and executives remain alert when it comes to potential inflated valuations in developing markets. According to experts, the reduction in leverage will slow growth of developing countries.

 “Sell into strength,” Arthur Budaghyan, a strategist at Montreal-based BCA Research Inc, was quoted as saying by Bloomberg.

“When the rally cracks in the weeks ahead, investors should establish short positions because the potential downside will be considerable.”, Budaghyan highlights.

On the other hand, the four-month performance of emerging-market equities, adjusted for volatility, relative to commodities, is near record highs, according to Bloomberg.

Read more at The Star