Emerging-market stocks and commodities are in a bubble that will deflate as China’s economic expansion slows, according to Albert Edwards, a strategist at Societe Generale.
The CHART OF THE DAY shows what may lie ahead by tracking year-over-year percentage changes in a Chinese leading economic indicator, compiled by the Organization for Economic Cooperation and Development. The chart also includes MSCI’s Emerging Markets Index and the Continuous Commodity Index, a gauge that used to be the Commodity Research Bureau Index.
For 10 straight months, the OECD’s index has risen at a slower rate. The indicator stood at 9.8 percent in September, the latest month available, after peaking at 26.9 percent in November 2009.
“Commodity and emerging-market bulls ignore the weak Chinese leading indicator at their peril,” Edwards wrote in a report today.
September’s reading was comparable to the level in June 2008, as the chart shows. Back then, emerging-market stocks were starting to tumble and commodity prices were peaking. History is likely to repeat itself, the report said.
“We are witnessing a bubble of epic proportions which will burst,” Edwards wrote. He added that investors are likely to be caught unaware by this collapse, as they were when a mid-1990s surge in Asian stocks gave way to a plunge.
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