Turning point for EM
In Asia and emerging markets, data for July suggest the growth of developing economies’ GDP is set to improve in Q3, after six years of near continuous deceleration. Almost all emerging market PMIs are back at more than 50. Although one quarter does not make a trend, it is important to take note.
The turning points in the performance of both emerging market debt and equities relative to their developed market counterparts coincide with turning points in GDP differentials. In other words, when the gap between emerging and developing market GDP growth starts to widen, emerging market assets start to outperform.
The gap may be about to widen due to the easing of severe recessions in Brazil and Russia, while other commodity exporters, such as Indonesia, are also turning a corner.
In particular, the recovery in consumer spending has gathered momentum since spending troughed in Q4 last year, led by healthy gains from non-commodity economy sales but also supported by the commodity economies.
Falling inflation in Asia has given policymakers renewed scope to adopt more accommodative monetary policy.
Importantly our ‘nowcast’ of Chinese GDP – an attempt to measure the true rate of growth that likely belies the official numbers – seems to have reached a firm floor this year.
We prefer emerging Asia to Latin America. Latin American equities have rallied sharply, but earnings momentum remains poor and the politics is unhelpful.
