Emerging Markets Outlook

Transkript

1 Emerging Markets Outlook Growth problems remain but immediate risks have come down M.J. Bakkum Senior Emerging Markets Strategist Multi-Asset Team 5 July

2 EM outlook 1. Pausing Fed and better Chinese data triggered EM rally in January 2. EM growth momentum and EM capital flows have been able to benefit 3. Since April, doubts about Chinese growth have increased again 4. But more recently, Brexit has made early Fed tightening more unlikely 5. For the medium-to-long term, headwinds to growth remain: Structural growth decline in China Low global trade growth (and globalisation into reverse?) Large debt overhang Still limited structural reforms 6. Key question is whether China sees/has room for even more stimulus 7. Narrowing external imbalances, but sharp fiscal deterioration 8. EM currencies must reflect weak growth prospects, large macro imbalances, higher political risk 9. EM assets remain vulnerable, but overall risks are more balanced 2

3 A rally; too early to call a new trend 110 Relative performance emerging / developed equities -2Y = 100, US$, MSCI EM / MSCI World (source: Datastream) Relative performance emerging / developed equities -10Y = 100, US$, MSCI EM / MSCI World (source: Datastream) Jun-14 Oct-14 Feb-15 Jun-15 Oct-15 Feb-16 Jun Jun-06 Jun-08 Jun-10 Jun-12 Jun-14 Jun-16 3

4 Rally triggered by better Chinese data (1) China: domestic credit total bank & non-bank claims, year-on-year % growth (source: PBoC, NNIP) Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 4

5 Rally triggered by better Chinese data (2) China: house prices nationwide, m-o-m and y-o-y % change (source: NDRC, NBS) Jan-06 Jul-07 Jan-09 Jul-10 Jan-12 Jul-13 Jan-15 Jul month-on-month (rhs) year-on-year (lhs) 5

6 Improving EM growth momentum Economic growth momentum in EM average 3-month momentum score 20 main markets (source: NNIP) Jun-14 Oct-14 Feb-15 Jun-15 Oct-15 Feb-16 Jun-16 6

7 Improving EM capital flows GEM capital flows (monthly basis) C.A. deficit + Δ FX reserves, US$bn, 20 main markets (source: Datastream) Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 7

8 China growth doubts re-emerged in May China sentiment TRMI China uncertainty, aggregate of 5 indicators (source: Thomson Reuters) May-15 Jul-15 Oct-15 Dec-15 Feb-16 May-16 8

9 Unwinding of the US dollar carry trade to continue 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 FX reserves emerging world 15 main economies, US$bn (source: NNIP) 0 May-96 May-00 May-04 May-08 May-12 May-16 9

10 But the risk of an early-moving Fed has declined 0.90 Fed fund futures implied rate generic 6-months contract (source: Bloomberg) Jun-14 Oct-14 Feb-15 Jun-15 Oct-15 Feb-16 Jun-16 10

11 Structural growth decline in China China: working-age population annual change, millions of people (source: Oxford Economics) Chinese indebtedness total domestic debt as a % of GDP (source: PBoC, NBS, NNIP) % 240% % % 5 180% 0 160% % % % % Q Q Q Q Q China: real GDP growth year-on-year change, % (source: NBS, NNIP forecasts) 0 Q Q Q Q Q Q

12 Low global trade growth Global trade growth global export volume, yoy % change (source: CPB) -25 Jun-96 Jun-99 Jun-02 Jun-05 Jun-08 Jun-11 Jun-14 12

13 Large debt overhang EM indebtedness total domestic debt as % of GDP, simple average 16 main EMs (source: NNIP) 130% 120% 110% 100% 90% 80% Q Q Q Q Q Q Q

14 Chinese stimulus: room for even more? Chinese credit yoy growth total credit, nominal GDP (source: PBoC, NBS, NNIP) 0 Q Q Q Q Q total credit growth nominal GDP growth 14

15 Narrowing external but widening fiscal imbalance Brazilian current account US$bn, 12-months accumulated (source: Banco Central do Brasil) Brazil: fiscal position primary fiscal surplus as % of GDP (source: Secretaria do Tesouro Nacional) 40 5 BALANCE(DISC.) CURN May-96 Sep-99 Jan-03 May-06 Sep-09 Jan-13 May-16-3 Apr-06 Apr-08 Apr-10 Apr-12 Apr-14 Apr-16 15

16 Higher political risk after six years of economic slowdown 16

17 EM FX has adjusted but remains vulnerable EM real effective exchange rate - long-term trend average of REERs (PPI-based) of 15 main EM currencies (source: JP Morgan) Jan-70 Jan-80 Jan-90 Jan-00 Jan-10 17

18 Conclusions 1. Doubts about Chinese growth remain, despite accelerating credit growth 2. Deleveraging and outflows likely to weigh on EM growth for years 3. But pausing Fed has clearly reduced pressure on EM 4. And immediate Chinese growth risks are smaller 5. Strong USD and weakening CNY are keeping pressure on EM FX 6. Small underweights in EM equities, EM local bonds. An overweight in EM hardcurrency sovereign debt 18

19 EM country preferences (equities) Where endogenous growth prospects are best, after reforms, because of fundamentals: India Where the potential of change is high: Argentina Where macro imbalances are low: Taiwan, Chile Relatively defensive markets that should benefit from a modest recovery in global trade: Thailand, South Korea Where the market adjustment has been severe: Colombia Where capital outflows and deleveraging will be most painful: Brazil, Malaysia, Turkey, South Africa Where sensitivity to the Chinese slowdown and weak commodity prices is highest: Brazil, Malaysia, Egypt Where political risks are the highest: Brazil, South Africa, Turkey, Philippines, Egypt Latin America Argentina 1 Brazil -2 Chile 1 Colombia 1 Mexico Peru Emerging Asia China India 2 Indonesia Malaysia -1 Philippines -1 South Korea 1 Taiwan 1 Thailand 1 EEMEA Czech Republic Egypt -1 Greece Hungary Poland Qatar Russia South Africa -2 Turkey -1 UAE 19

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