Emerging markets: will 2016 be the turnaround?

Bastien Drut, Karine Herve and Eric Mijot are part of Amundi’s strategy and economic research.

Since 2011, emerging markets have tended to underperform developed markets. This has been the case in particular since mid-2014, when commodity prices began to fall even faster.

But so far this year, emerging markets have managed to weather the turbulence caused by volatile oil prices and concerns over China.

In recent years, emerging markets have accustomed us to short-lived spikes. What about now? In this note we look more closely into this question, including a review of both macroeconomic factors and (currency and equity) market factors.

Multi-track emerging economies
Since the normalisation of US monetary policy was announced in spring 2013, emerging economies have been constantly exposed to new shocks.

Economically, the drop in commodity prices that began in mid-2014, which came at the same time as the Chinese slowdown, may have benefited all end-consumers but hit net commodity exporters hard (through depreciation in their currencies, higher inflation, tightening of the policy mix, etc.).

In the wake of additional (geo)political idiosyncratic shocks, Russia and Brazil look like the big losers among emerging economies with both suffering recessions of close to 4% in 2015, recessions that are unlikely to end until the (late) 2017.

Obviously, not all emerging countries have been affected the same by falling commodity prices and the Chinese slowdown. Commodity-exporting economies that had adopted hawkish monetary and fiscal policies (Mexico, Chili,
Peru and Colombia) had room to mitigate the impact of tighter financial conditions caused by the depreciation of their currencies, unlike Venezuela and Brazil, for example.

For net commodity-importing countries, particularly Asian ones, lower commodity prices have helped offset the impact of the Chinese slowdown to such an extent that most of these countries’ growth in 2015 was about the same as in 2014.

Central Europe, meanwhile, benefited from both lower commodity prices and a strong German economy. All in all, GDP growth in emerging markets shrank by about one percentage point from 4.8% in 2014 to 4% in 2015. While all regions were hit by slower growth, there were still some wide divergences.

For example, while emerging Europe and Latin America turned in slightly negative growth rates, Asia expanded at almost 6%. Keep in mind, however, that there were also wide differences between countries within the same region.

Countries do not differ on the basis of growth criteria alone. Central bank monetary policies have also been tightly restrained by the international economic environment.

Whereas net commodity-exporting countries have had to raise their key rates to varying degrees, in reaction to pressures on their exchange rates and domestic inflation, Asian and Emerging Europe countries have begun monetary easing cycles due to de/disinflationary pressures from the euro zone, as well as China.

The resilience of major economies (United States, the euro zone and China) should provide some support for emerging economies. First of all, in advanced economies, the euro zone and the United States in particular, economic indicators are relatively reassuring, even if they still point to soft growth.

In the US, job market figures in particular calmed the markets, and a recession appears to be less likely.

Moreover, US rates are likely to be tightened less than had been expected a few weeks ago (the median Fed Fund projections of FOMC members is now just two Fed funds hikes in 2016, down from four at the December FOMC meeting).

Emerging economies, whose financing conditions have worsened considerably since 2014, are expected to be less constrained in terms of monetary policy, which will provide a boost for these countries.

In the eurozone, in addition to economic indicators, the ECB’s 10 March announcements were well above the markets’ expectations, in contrast with after the Council of Governors’ meeting last December, and that should make it possible to stabilise growth in the euro zone. Moreover, measures announced by the Chinese authorities reinforce the premise that China is likely to avoid a hard landing.

And, regarding oil, February discussions between producing countries (while not resulting in any concrete agreement) at least prevented a further drop in prices.

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