There are some signs that turbulence in emerging markets – and worries about China’s economy – have abated slightly but reasons for caution persist, according to Coutts, the private bank, in its latest “View from Asia” commentary.

“We would be cautious about getting too excited about the signs of stabilisation in the performance of emerging market equities. In the last few weeks, retail investors have stopped selling and in China last week the authorities showed some very tentative signs of providing support for growth,” Gary Dugan, chief investment officer for Asia and Middle East, said in the note.

“Our chief concern remains the tightening of credit conditions in many of the BRIC countries. Brazil and India face probably still higher interest rates and China is unlikely to turn back its downward pressure on lending growth,” Dugan said.

China has given causes for concern as the once red-hot pace of economic growth has decelerated, although it remains above a 7.5 per cent growth rate that analysts have said would trigger stimulatory measures by the government. In the year to date, the MSCI China Index of equities has fallen by 8.9 per cent (source: MSCI Barra).

Recent China data has driven concerns. The latest China Purchasing managers’ survey of industrial confidence was below expectations and lower than June’s figure, which itself was the lowest in 11 months. “The weakness was broad based,” Dugan said.

Dugan said he also has concerns about the Indian economy.

“The previously expected easing of monetary policy has become a dream rather than a likely event. The Reserve Bank of India meets this week; it could be negative for the market if they announce more tightening measures. The pace of corporate earnings forecasts downgrades has increased,” Dugan said.

“We worry that the equity market could correct by 5-10 per cent in the coming months. The sharp increase in short-term interest rates has added further challenges to an economy that already has seen some of the lowest levels of industrial confidence in some years,” he said.

Japan

Turning to Japan, Dugan noted how the Asian country’s stock market has eased back from recent highs amid investors’ perceptions that reforms of the economy may move more difficult to carry out than previously thought. The first major reform to emerge – expected around November this year – will involve changes to the government’s pension investment fund, with an expected increase in the holdings of equities and greater exposure to overseas assets than at present.

On the bond side, Dugan said that any further rise in US economic growth - heralding a further retreat from quantitative easing – will lead to a sharp fall in bond prices in various markets.

“We continue to urge investors to reduce duration (interest rate sensitivity) and hold quality bonds in their Asia portfolios,” Dugan concluded.