Emerging Markets Outlook

Emerging Markets
Outlook
Growth problems remain but immediate risks have
come down
M.J. Bakkum
Senior Emerging Markets Strategist
Multi-Asset Team
5 July 2016
www.nnip.com1
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
A rally; too early to call a new trend
Relative performance emerging / developed equities
-2Y = 100, US$, MSCI EM / MSCI World (source: Datastream)
110
100
90
80
Relative performance emerging / developed equities
-10Y = 100, US$, MSCI EM / MSCI World (source: Datastream)
190
70
Jun-14
170
150
Oct-14
Feb-15
Jun-15
Oct-15
Feb-16
Jun-16
130
110
90
70
Jun-06
Jun-08
Jun-10
Jun-12
Jun-14
Jun-16
3
Rally triggered by better Chinese data (1)
China: domestic credit
total bank & non-bank claims, year-on-year % growth (source: PBoC, NNIP)
40
35
30
25
20
15
10
5
0
Jan-03
Jan-05
Jan-07
Jan-09
Jan-11
Jan-13
Jan-15
4
Rally triggered by better Chinese data (2)
China: house prices
nationwide, m-o-m and y-o-y % change (source: NDRC, NBS)
15
2.5
12
2.0
9
1.5
6
1.0
3
0.5
0
0.0
-3
-0.5
-6
-1.0
-9
Jan-06
-1.5
Jul-07
Jan-09
Jul-10
month-on-month (rhs)
Jan-12
Jul-13
Jan-15
Jul-16
year-on-year (lhs)
5
Improving EM growth momentum
Economic growth momentum in EM
average 3-month momentum score 20 main markets (source: NNIP)
0.50
0.25
0.00
-0.25
-0.50
-0.75
-1.00
Jun-14
Oct-14
Feb-15
Jun-15
Oct-15
Feb-16
Jun-16
6
Improving EM capital flows
GEM capital flows (monthly basis)
C.A. deficit + Δ FX reserves, US$bn, 20 main markets (source: Datastream)
200
150
100
50
0
-50
-100
-150
-200
-250
Jan-05
Jan-07
Jan-09
Jan-11
Jan-13
Jan-15
7
China growth doubts re-emerged in May
China sentiment
TRMI China uncertainty, aggregate of 5 indicators (source: Thomson Reuters)
0.0
-0.1
-0.2
-0.3
-0.4
-0.5
-0.6
May-15
Jul-15
Oct-15
Dec-15
Feb-16
May-16
8
Unwinding of the US dollar carry trade to continue
FX reserves emerging world
15 main economies, US$bn (source: NNIP)
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
May-96
May-00
May-04
May-08
May-12
May-16
9
But the risk of an early-moving Fed has declined
Fed fund futures implied rate
generic 6-months contract (source: Bloomberg)
0.90
0.80
0.70
0.60
0.50
0.40
0.30
Jun-14
Oct-14
Feb-15
Jun-15
Oct-15
Feb-16
Jun-16
10
Structural growth decline in China
China: working-age population
Chinese indebtedness
annual change, millions of people (source: Oxford Economics)
total domestic debt as a % of GDP (source: PBoC, NBS, NNIP)
25
260%
20
240%
15
220%
10
200%
5
180%
0
160%
140%
-5
120%
-10
100%
-15
1980
1990
2000
2010
2020
80%
Q1 1997
2030
Q3 2001
Q1 2006
Q3 2010
Q1 2015
China: real GDP growth
year-on-year change, % (source: NBS, NNIP forecasts)
16
14
12
10
8
6
4
2
0
Q1 1992
Q1 1997
Q1 2002
Q1 2007
Q1 2012
Q1 2017
11
Low global trade growth
Global trade growth
global export volume, yoy % change (source: CPB)
25
20
15
10
5
0
-5
-10
-15
-20
-25
Jun-96
Jun-99
Jun-02
Jun-05
Jun-08
Jun-11
Jun-14
12
Large debt overhang
EM indebtedness
total domestic debt as % of GDP, simple average 16 main EMs (source: NNIP)
130%
120%
110%
100%
90%
80%
Q1 1996
Q1 1999
Q1 2002
Q1 2005
Q1 2008
Q1 2011
Q1 2014
13
Chinese stimulus: room for even more?
Chinese credit
yoy growth total credit, nominal GDP (source: PBoC, NBS, NNIP)
35
30
25
20
15
10
5
0
Q1 1998
Q1 2002
Q1 2006
total credit growth
Q1 2010
Q1 2014
nominal GDP growth
14
Narrowing external but widening fiscal imbalance
Brazilian current account
Brazil: fiscal position
US$bn, 12-months accumulated (source: Banco Central do Brasil)
primary fiscal surplus as % of GDP (source: Secretaria do Tesouro Nacional)
40
5
BALANCE(DISC.) CURN
20
4
0
3
2
-20
1
-40
0
-60
-1
-80
-100
May-96
-2
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
Higher political risk after six years of economic slowdown
16
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)
140
135
130
125
120
115
110
105
100
95
90
Jan-70
Jan-80
Jan-90
Jan-00
Jan-10
17
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
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
Brazil
Chile
Colombia
Mexico
Peru
Emerging Asia
China
India
Indonesia
Malaysia
Philippines
South Korea
Taiwan
Thailand
EEMEA
Czech Republic
Egypt
Greece
Hungary
Poland
Qatar
Russia
South Africa
Turkey
UAE
1
-2
1
1
2
-1
-1
1
1
1
-1
-2
-1
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