Emerging markets: Improving growth momentum

It has been the combination of better growth and flow data from China, the strong global search for yield and the improving growth momentum in the emerging world that explains why investor risk appetite towards EM assets has increased so much recently.

EM growth momentum continues to strengthen. It is now back in positive territory for a few weeks and still rising. The main reason has been the easing of financial conditions thanks to the better EM capital flow picture.

Of the twenty main emerging economies, six still have a negative growth momentum (in these countries growth continues to slow – Malaysia and Egypt are the worst) and nine have an outright positive growth momentum. These nine are Indonesia, South Korea, Taiwan, Brazil, Chile, Poland, Russia, South Africa and Turkey. In some of these, the recession had become so bad that some improvement became almost inevitable. Brazil and Russia are good examples. In others, the modest improvement in global trade volume growth of the past two quarters has played a role. Korea and Taiwan have benefited most. But for most emerging economies, and most prominently in Indonesia, Brazil, South Africa and Turkey, it has been the declining local interest rates that have made a (still modest) growth improvement possible.

For the recovery to continue we need to see EM flows not turning negative again. This brings us back to China and the Fed. Chinese data and Fed expectations should not deteriorate too much. EM fundamentals remain too fragile for us to believe that EM growth can recover thanks to endogenous factors. The main problems remain the large debt overhang and the interventionist government policies with little supply-side reforms. But for now, EM growth is recovering, which is already quite a change after five years of slowdown.

Willem Verhagen – Senior Economist – NN Investment Partners