NN IP: EM monetary conditions easiest in three years
Analysis by NN Investment Partners (NN IP) shows monetary conditions in Emerging Markets (EM) are easier now than at any time in the last three years, helping to support the sector’s economic growth as data points to a continuing slowdown in China.
The NN IP Monetary-Policy-Stance indicator is based on central bank policy rate, one-year interest rate swap, five-year bond yield and real M2 growth in the 20 main emerging economies.
On 8 August it was at 1.05 on a scale of plus/minus-Three. The Indicator turned positive on 7 March. It had been in negative territory since January.
The findings are announced as latest economic data from China shows retail sales were up by 10.2% in July compared with a year earlier but lower than the 10.6% increase in June. Industrial output rose by 6% compared with the same period the previous year but was still weaker than analysts had expected. Exports fell by 4.4% compared to a year earlier and imports were also weaker than estimated, down by 12.5%.
As long as the global liquidity environment remains benign and inflation in emerging markets continues to decline, authorities in the emerging world will continue to loosen monetary policy. Our Monetary-Policy-Stance Indicator has sharply risen since May, which tells us that more additional monetary easing has been taking place recently. For emerging debt markets this is hugely important. Not only because declining yields push the value of the bonds higher, but also because more easing of financial conditions should help the EM growth recovery to broaden out and strengthen.
At this stage we are more concerned about the recent deterioration of Chinese data. We still think that the Chinese economy is printing reasonable numbers, but doubts about the growth stabilization have emerged again. Real estate sales growth seems to have peaked, while private investment growth continues to struggle. A big positive change compared with last year and the beginning of this year remains the capital flow picture. The authorities have been successful in stabilizing flows, which suggests that policy makers are in control again.
We are keeping our view that Chinese growth is in a multi-year slowdown. A sharp deceleration with increasing system pressures was what we feared last year. Recent data still give enough comfort that the current pace of slowdown is manageable. But at the same time, we continue to think that a deterioration in Chinese growth is the single-most important risk to all EM assets. So if we talk about the recent resilience of EM debt, we feel that the most remarkable aspect has been that investors have shrugged off the disappointing Chinese data.
Maarten-Jan Bakkum, Emerging Markets Strategist at NN IP