NN IP indicators point to continued strengthening in emerging markets

The pick-up in global trade, which is partly the result of good growth dynamics in China, is having a positive impact on emerging markets (EMs). NN Investment Partners’ (NN IP) own proprietary indicators show that EMs continue to strengthen.

The NN IP EM Financial Conditions Indicator has been in positive territory since January this year and has improved again in recent weeks to its current level of 0.81 on a scale of plus/minus 3 (See graph below). This means that the outlook for domestic demand growth in EM continues to brighten. The Indicator captures the change in policy rates, market interest rates, money supply, fiscal policy, fiscal policy expectations, effective exchange rates and capital flows for the 21 main emerging economies.

The recovery in capital flows to EMs is the main reason why their financial conditions continue to ease. This is producing the first meaningful pick-up in their credit growth since the 2009-2011 boom that followed the Lehman collapse. Stronger credit growth, from 6% in Q1 to 8% now, should help boost the domestic demand recovery in the coming quarters.

Capital flows to EMs also continue to be strong. In July, thanks to worries about a faster-than-anticipated normalisation of developed market (DM) monetary policy abating, broad capital flows clearly picked-up compared with June.

With all main emerging economies having published their FX reserves position for July, we estimate there was an aggregate inflow of USD 18 billion to EMs, compared with an outflow of USD 15 billion in June and an average inflow of USD 4 billion in the first five months of the year.

Maarten-Jan Bakkum – Senior Emerging Markets Strategist – NN Investment Partners