EM set to continue outperformance despite current pressures
May 14, 2018

Despite continued pressure on emerging markets (EMs), it is too early to call the end of their equities outperformance versus developed markets (DMs), says Maarten-Jan Bakkum, Senior Emerging Markets Strategist at NN Investment Partners (NN IP).

Although the global environment for EMs has become more challenging, their economic growth remains positive and a turnaround would require a large and lengthy tightening of financial conditions, he says.

He adds that NN IP's EM Financial Conditions Indicator, which captures changes in policy rates, interest rate expectations, fiscal policy, exchange rates and foreign capital flows for the whole EM universe, has been falling since April, and last week turned negative.

The deterioration in the global liquidity environment for EM comes at a moment when the growth momentum in EM is still rather strong, he notes. Important here is the steady recovery in EM credit growth, from 6 percent in Q1 2017 to a current 10 percent pushing domestic demand growth higher, and the still-strong global demand that has kept EM export growth in double digits.

"There is little doubt that tighter financial conditions pose a risk to EM growth," he says. "But for now, we feel it is too early to call the end of the EM credit recovery. The relative strength of China, India, Korea and Russia in this environment is encouraging. These markets should help to keep the EM-DM outperformance trend intact."

 





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Despite continued pressure on emerging markets (EMs), it is too early to call the end of their equities outperformance versus developed markets (DMs), says Maarten-Jan Bakkum, Senior Emerging Markets Strategist at NN Investment Partners (NN IP).

Although the global environment for EMs has become more challenging, their economic growth remains positive and a turnaround would require a large and lengthy tightening of financial conditions, he says.

He adds that NN IP's EM Financial Conditions Indicator, which captures changes in policy rates, interest rate expectations, fiscal policy, exchange rates and foreign capital flows for the whole EM universe, has been falling since April, and last week turned negative.

The deterioration in the global liquidity environment for EM comes at a moment when the growth momentum in EM is still rather strong, he notes. Important here is the steady recovery in EM credit growth, from 6 percent in Q1 2017 to a current 10 percent pushing domestic demand growth higher, and the still-strong global demand that has kept EM export growth in double digits.

"There is little doubt that tighter financial conditions pose a risk to EM growth," he says. "But for now, we feel it is too early to call the end of the EM credit recovery. The relative strength of China, India, Korea and Russia in this environment is encouraging. These markets should help to keep the EM-DM outperformance trend intact."

 



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