“Despite commentators’ continued speculation about volatility in the Chinese stock market, the only meaningful downwards revisions to growth took place in developed economies,” Dehn said. The IMF made large downwards revisions to US growth, while maintaining its forecast for China to grow 6.8% this year.”
“In its mid-year World Economic Outlook update, the IMF downgraded growth in developed market by 0.3%, which is three times more than for emerging markets which is down just -0.1%,” Dehn continued’ “The IMF now estimates EM to grow 4.2% in 2015, which is twice as fast as developed economies. Moreover, the IMF saw no reason to downgrade the outlook for Chinese growth, while the outlook for the US was revised down sharply (at -0.6% it was one of the largest in the world.”
Conversely, Dehn believes there is over-optimism about developed markets, given the volatility of first world currencies over the past two years.
“Measured by the 3 month at-the-money forward volatility, EM currency volatility is now lower than G7 currency volatility, 9.2% versus 10.3%,” Dehn noted.
He said there is a ‘declining trend’ for EM currency volatility has been in place since the second half of 2013. Over this period EM currency volatility has declined by more than 20% cumulatively, while G7 currency volatility has increased by about 3%, he noted.
Dehn added that this ‘dovetails well’ with the view that after four years of appreciation, the strong dollar is now hurting the US economy. This means there may now be less upside for the dollar versus EM currencies, as well as continued higher volatility, Dehn said.
