Goldman Sachs says the analogy doesn't add up
From today's morning note:
With China data slowing despite significant policy easing there and with EM market pressures intensifying, particularly in the FX space, the specter of something akin to the 1997 Asia crisis has become a topic of conversation. Certainly, from the perspective of China narrowly, we do not fully see the analogy.
First and foremost, because we envisage some stabilization in growth by year and as policymakers there continue to deploy a wide array of tools. And although China is a large economy, its financial sector linkages remain more modest, and having run current account surpluses it has also built up a sizeable reserve buffer. But even across the EM complex more generally, with flexible exchange rates, with currencies that have already adjusted significantly, and with greater reserve backstops now vs. then (Exhibit 12), at a first glance, the scope for the same type of global worries as in the mid-1990s seems still distant.
Moreover, even back then, the sharp Asian contraction had no perceptible impact on US growth (Exhibit 13). And so, while some heightened concerns seem warranted, with our economic and market forecasts largely intact, as market worries become more widespread, our bias is to think that market opportunities will arise from this process.
Markets have gone through similar (though perhaps not as severe) bouts of acute worries over the last 18 months. Yet throughout, vol spikes have been positively correlated with forward returns, with times of market stress having been valuable opportunities to re-engage."
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