Global markets to log worst quarter since 2011

Globe

Global stock markets are headed for their weakest quarterly performance in four years after a torrid summer that saw investor sentiment rocked by developments in the world's two largest economies.

A sustained collapse in commodity prices, China's stunning market rout followed by its shocking currency devaluation as well as fears of a Greek default and a September U.S. interest rate hike were some of the numerous factors that made the past three months a summer to remember (or forget) for investors.

"Global equities are closing in on their worst quarter since 2011, with a number of factors fueling fears in an already jittery market, including weak global growth, driven by deceleration in emerging markets, particularly China," Barclays analysts said in a Wednesday report.

Read More Emerging market ETFs suffered $19B in outflows this year

China's benchmark Shanghai Composite appeared to be one of the world's worst performers, on track for a near 30 percent loss. That would mark its weakest performance since 2008.

In comparison, the S&P 500 , Dow Jones Industrial Average and Nasdaq were all headed for a 9 percent loss. In Europe, Germany's Dax was set for a 15 decline, 11 percent for the French CAC, 8 percent for Italy and 13 percent for the Ibex.

Indeed, much of the blame seems to be falling on weakness in emerging markets (EMs).

New data from the International Institute of Finance (IIF) on Wednesday showed EMs suffered their worst quarter since 2008 as global investors sold $40 billion of EM assets, with the retrenchment fairly evenly divided between equities ($19 billion) and debt ($21 billion). During 2008, the height of the global financial crisis, emerging markets saw outflows to the tune of $105 billion, the IIF said.

"Dovish signals after the Fed's policy meeting [earlier this month] only provided a short-lived boost to EM portfolio flows, and daily data show renewed outflows in late September," the organization noted.

In Asia-Pacific, indices are also headed for their weakest quarterly performance in four years, aggravated by a global stock rout in August, Bernard Aw, IG market strategist, told CNBC.

Out of Asia-Pacific's 15 major stock markets, only one appeared to end the third quarter in positive territory.

Sri Lanka's Colombo Stock Exchange is set for a modest 1 percent bounce amid strong foreign buying, and a more market-oriented currency. Earlier this month, Sri Lanka's central bank stopped quoting a reference rate for the local rupee , letting markets determine the rate instead. Moreover, political stability has returned with the formation of a new unity government under President Maithripala Sirisena and Prime Minister Ranil Wickremesinghe following elections in August.

The region's weakest market after Shanghai was Hong Kong's Hang Seng Index, which was set to close out the quarter 20 percent lower. Among other major losers, the Nikkei 225 and Indonesia's Jakarta Composite were both headed for 15 percent declines.

Read More HK stocks: Between a rock and a hard place

Many analysts expect a cloud of pessimism to loom over global equity markets for a while, warning that any short-term rallies will likely be temporary.

"With downside risks to commodities and worries about debt-laden emerging markets being buffeted by U.S. rate hikes persisting, dead cat bounces could disappoint for some time!" said Mizuho senior economist Vishnu Varathan, alluding to a market term for a short-lived increase in the price of a declining asset.

Barclays recommends overweight positions in Japanese and European equities since valuations in the U.S. are relatively less attractive.

The Nikkei index is currently trading at a price to earnings ratio of 16.92, compared with 18.14 for the S&P 500, according to Reuters data. The corresponding figure for the Euro Stoxx 600 index is 15.36. A higher P/E ratio suggests that stocks are more expensive relative to earnings.

For the October-December period, IG's Aw predicts Japanese equities could be among the best performers within Asia, citing solid corporate earnings thanks to a weaker yen and valuations that are at four-year lows.

"In addition, the Nikkei may be bolstered by fresh speculations of more Bank of Japan easing, especially if inflation readings deteriorate considerably in the coming months."

JefferiesAnd the Best Place to Work in the global financial markets 2016 is...

Register for Financial Markets News Alerts