Purchasing managers’ surveys this week showed that manufacturers in the euro area, US and UK are enjoying a steady recovery, which economists believe is symptomatic of the wider economy. The UK recovery "is looking increasing solid", says Rob Wood at Berenberg Bank. And Fidelity’s Trevor Greetham expects "a strong pick-up" in US growth.
But surveys also showed the biggest drop in Chinese manufacturing output since November 2011, while a survey by the Bank of Japan revealed a fall in firms’ expectations for future business. "The Chinese economy is definitely slowing," says Erik Britton at Fathom Consulting. John Llewellyn at Llewellyn Consulting warns of a risk of disappointing growth in both Japan and major emerging markets both this year and next.
Some believe this global rebalancing will help western stock markets. Ryan Gregory at Barclays says the western upturn should "more than offset" the Asian and emerging market slowdown, thus raising corporate earnings and share prices. In recent years, there has been a strong positive correlation between US industrial production growth and returns on western equities.
It’s possible too that the Asian slowdown will lead to easier monetary policy which will also boost western shares. Many economists expect the Bank of Japan to announce more quantitative easing in an effort to boost its economy, and some of this extra cash might be reinvested into equities. And the Asian slowdown might even force the ECB to act. Dario Perkins at Lombard Street Research points out that Germany’s exporters will suffer as China slows, and any further fall in the renminbi or yen would exacerbate the ECB's concerns that a strong euro is holding back the recovery and increasing the risk of deflation.
Although Mr Perkins thinks the ECB might prefer to cut interest rates before undertaking QE, either policy could support shares.
But not everyone is so optimistic. The mere fact of a Chinese slowdown could be bad for western shares simply because it would create extra uncertainty. And losses on emerging market equities and currencies could spill over into developed markets, perhaps via the danger of bank losses prolonging the squeeze on lending. Equities, says Mr Llewellyn, "are increasingly vulnerable to a major, not just minor, correction."
