The MSCI All Country Asia-Pacific Index fell 1.26% on 6 December, its worst one-day drop this year and its eighth consecutive daily decline, the longest losing streak since August 2015. Concerns that deleveraging in China will slow the economy are partly to blame, which has also hurt commodities; copper fell more than 3% on 5 December, its biggest one-day fall in three years.
But these declines should be viewed from a wider perspective:
- Moderate profit-taking toward year-end after a sustained rally is not surprising. Even after recent declines, the total return on the MSCI AC Asia-Pacific Index is up 27% this year, while the gross return on MSCI China is up almost 50%.
- Copper prices are unlikely to collapse. Copper has fallen 7% since its end-November highs, but has risen 42% over the past two years. We expect global demand growth for copper in 2018 to moderate to 2.5% from 2.8% this year on the back of decelerating economic growth in China, leaving the global copper market with a deficit equivalent to 1% of annual demand.
- China’s deleveraging will be gradual and controlled. The People’s Bank of China is currently draining liquidity, but has shown it is willing to inject funds when needed to balance the market. We expect China’s GDP growth will only slow to 6.4% next year, compared with 6.8% this year.
So we see no reason for investors to be alarmed. We don’t expect China’s deleveraging to disrupt global markets, and we still overweight China and Asia ex-Japan equities within our tactical asset allocation for Asia. We see copper trading at USD 7,100/mt in six months (versus USD 6,565/mt now).
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