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February 2014 Capital Markets Monitor and Teleconference
The Year of Validation: Emerging Market Vulnerabilities Coming to the Fore
The key theme highlighted in our January CMM—dependence on asset values—has come into focus during the recent gyrations in financial markets. The liquidity-supported increase in asset values in recent years has strengthened consumer confidence and spending, and could potentially create a virtuous cycle to sustain economic recovery going forward. However, the foundation of such a liquidity, asset value and growth nexus is not solid. The vulnerabilities of some emerging market countries have been crystalized into selloffs—triggered by the combination of ongoing Fed tapering and a surprise fall in China’s January flash manufacturing PMI to below 50, exacerbated by early-February signals of weaker U.S. and UK manufacturing activity.
Adding to these broad macro concerns have been disappointing Q4 2013 earnings reports from a number of major U.S. firms including Apple, Chevron, Amazon and General Electric. Concern about corporate revenue growth in Europe is already evident in forward earnings estimates, and is likely to become more pronounced given the relatively high exposure of many European firms to emerging market countries.
In the period ahead, another key soft spot to watch is whether recent substantial increases in mature equity market prices will be validated by an acceleration in earnings growth.
Following the publication of the Capital Markets Monitor Hung Tran hosted a teleconference on February 5, 2014. The recording of the briefing and the Q & A session is now available for replay.