Update on Emerging Markets- In our previous blog, https://www.plindia.com/blog/is-a-money-tsunami-on-its-way-to-india/, we had mentioned the possibility of India starting to receive receiving excellent flows – and that transpired with March 2019 seeing USD 6 Bn in equity and USD 3 Bn in debt.
Since then , fundamentals seem to have improved further for EMs – and prospects of a relative rally versus the DMs are beginning to harden. The MSCI Emerging Markets Index has risen 9.67% during the first quarter of 2019- with China taking the honors with a 24% rise, staging an impressive comeback. So whats been up!
Below is an update on key developments in the recent days:
The Year of the Pig begins well for China
The Chinese stock market has recovered most of the losses of the second half of 2018, with small-caps up 35% in the first quarter on the back of strong stimulus from the PBOC. On April 16, 2019, Chinese markets celebrated as GDP came ahead of expectations at 6.4% – and first-quarter credit growth of 10.7% was way above the PBOC’s goal .
Chinese investors boosted leverage for 10 straight sessions through Wednesday to a 10-month high of 960.3 billion yuan ($143 billion).
This also powered the Nifty as it plays with a breakout of the previous highs at 11800 odd levels.
Chinese exports also have recovered from the seasonal slump in 2019. All this PBOC “extra” liquidity has found its way into the system, boosting asset prices and jump-starting the economy. Chinese 10-year bond yields also are increasing. They hit 3.4% here on Tuesday morning, April 16, the highest level since December.
The fourth-quarter earnings cycle for Chinese companies is well under way (58% of the MSCI China Index have reported), and so far, on average, more earnings and revenue “beats” than “misses” have been reported.
Global Rate Environment
Overall, markets are facing a looser monetary environment around the globe, which is good for emerging markets. If anything, the environment may even be looser. This also means – that the case for a strong U.S. dollar in 2019 continues to weaken.
Optimism around developing market equities got a boost after the International Monetary Fund said last week that it sees emerging markets as a “bright spot”, even as the fund lowered its global growth outlook to 3.3 per cent for 2019 from a forecast of 3.5 per cent in January, Mr Mumford said.
With improved prospects for the second half of 2019, global growth in 2020 is projected to return to 3.6 percent. This recovery is precarious and predicated on a rebound in emerging market and developing economies, where growth is projected to increase from 4.4 percent in 2019 to 4.8 percent in 2020.
Beyond 2020, global growth is expected to stabilize at around 3½ percent, bolstered mainly by growth in China and India and their increasing weights in world income, as per the IMF.
Economic Surprise Index- More Predictable
Since mid-March, the Citi Economic Surprise Index for Asia Pacific has indicated that even though data releases have been worse than expected, the trend is shifting to in-line expectations increasingly — meaning that developing economies seem to be reverting to near normal economic realities.
Risks
The US Earnings season is under way and its highly likely that the beginning of weakening in the US may start rearing its ugly head. Auto numbers from Europe came in weak 8th month in a row with a decline of 10% – and therefore, the transition from DM to EM growth will be volatile – one cant rule out major moves in currencies sometime middle of year.
Crude Oil has strengthened quietly and it seems more than just a technical correction as COT (Commitment of Traders) data is showing speculative positions coming back last few weeks- which had dropped off last year around 80 USD Levels – which shows that crude may not weaken any time soon.
Clearly the US China trade war is one of the major overhangs but markets are fairly confident in the next couple of months that there may be a substantive agreement. Finally, a much more severe El Nino than what the IMD predicts- remember IMD is more optimistic than other global agencies – and may throw all of the above in disarray but as of now, the world looks much brighter for EMs than it did in December!
Watch this space for updates!