Those of a bearish inclination have been having a hard time this summer in the west, but China is a whole ‘nother thing. The Shanghai Composite is at another three and a half year low, and has been falling, on and off, since its post-crisis peak in August 2009.
Another way of looking at China is to say it is suffering from the effects of an outrageous policy-induced bubble, which was partially reinflated by the government during the crisis.
This chart shows the Shanghai index against the Nasdaq during the dotcom bubble, both rebased. In green is the S&P 500. The wild swings in China and pure-play dotcoms make the booms and busts of the S&P look tame – but still left those investors able to get their money into Chinese onshore shares (protected by capital controls) better off, at least for the moment.
China is the biggest emerging market (EM), and the rest of the emerging world seems to be taking its lead from the Chinese slowdown. An interesting note from UBS points out that EM corporate earnings have been coming in well below forecasts.
Even worse, the 7.1 per cent profit margin now pencilled in by analysts for this year is lower than at the worst point of the crisis in 2008. This UBS chart shows how net margins in the past have moved with GDP. The 2012 estimate isn’t on the chart, but would continue the directional link. As you can see, forecasts for 2013 are slightly better, but should not encourage hopes of a sudden recovery in profit margins.
As Nicholas Smithie at UBS says:
Expectations for 14% [earnings] growth in 2013 seem almost impossibly high in comparison with the feeble results of 2011 and 2012, both of which years began with estimates of low teen earnings growth but which subsequently failed to meet expectations
In spite of share price drops, there is scope for plenty more disappointment.