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July 2017
Marketing Material

Emerging Markets Monitor

Pictet Asset Management’s monthly selection of the key charts and data trends to watch in the emerging market space.

01

What caught our eye

Rising consumer confidence sends positive signal for EM growth

Nearly 80% of emerging markets have seen an increase in consumer confidence compared with a year ago.

Surprisingly enough, Brazil is leading the way despite yet more corruption scandals.

Find out more on Brazil in the 'In focus' section of this edition of the EM Monitor.

EM consumer confidence change by country
In % Y/Y, 3-month moving average
1_EMConsumerConfidenceYYChange_Centered.png
Source: Pictet Asset Management, CEIC, Datastream, based on latest available data as at May 2017.
02

EM health check

Stronger investment spending and exports fuelled higher growth in Q1, while annual private consumption growth was unchanged. Our proprietary GDP indicator1 shows solid momentum, pointing towards a demand growth rate of 4.7% for 20172.

In manufacturing, our aggregated PMI survey remains at a level typically associated with a higher industrial production of 5.3%3, showing there is room for growth from the current level of 4.4%.

EM leading indicator & GDP (left) / EM PMI & industrial production (right) 
2_EMLeadingIndicator_PMI_Centered.png

Source: Pictet Asset Management, CEIC, Datastream. 
Left chart:
EM GDP data to February 2017. EM leading indicator data to May 2017. *GDP-weighted average of 24 countries leading indicators. **GDP-weighted average of 30  countries real GDP.
Right chart:
Industrial production data to April 2017. EM PMI data to June 2017. *24 Manufacturing PMIs GDP weighted. **31 industrial production GDP weighted.

Subdued private consumption: should we be concerned?

EM growth has reached its fastest pace since Q3 2014. The one concern for investors could be private consumption growth, which was flat over Q1.

However, we believe private consumption will strengthen:

  1. EM consumer confidence is at its highest level since December 1993.
  2. The unemployment rate has fallen from a peak of 6.2% in August last year.
  3. After a sharp decline at the end of 2016 (grey line, inverted scale), nominal wages growth has been accelerating.
     
EM private consumption (volume) & consumer confidence (Left) / EM unemployment rate (1-year change) & nominal wages (right)
3_3ReasonsForConsumerConfidence_Centered.png

Source: Pictet Asset Management, CEIC, Datastream.
Left chart:
Confidence data to February 2017; private consumption data to May 2017.
Right chart:
Unemployment rate data to March 2017; nominal wages data to April 2017.

EM consumption growth could reach 5.4% in 2017, compared with 4.2% in 2016.
EM medium-term private consumption function*
4_ThreeReasonsCombined_Centered.png
Source: Pictet Asset Management, CEIC, Datastream. * Function: proprietary indicator compiling consumer confidence, unemployment rate, real wages.
EM private consumption data to February 2017. Function data to December 2017.
03

In focus: Brazil

By Anjeza Kadilli, Economist

Political corruption remains Brazil's biggest risk

Brasil_EM Monitor

Sao Paulo, Brazil - August 16, 2015: Demonstration against corruption in the Avenida Paulista in Sao Paulo.

After the impeachment of Dilma Rousseff last year, Brazil is once again paralysed by political corruption scandals. Its new president, Michel Temer, has been charged with a number of criminal offences.

While the probability of Michel Temer being impeached has increased, we believe this is not the most likely scenario due to the broad political support he still enjoys. However, his impeachment would threaten progress in the economic reforms long-awaited by investors.

Brazil’s economy is stabilising, but slowly

Q1 2017 saw the first improvement in real GDP (+1% q/q) after 2 years of unprecedented recession (-3.8% in 2015 and -3.6% in 2016).

As with most other emerging markets, growth was mainly driven by net exports, while public and private consumption and investment were a drag.
Realised & potential real GDP growth, leading indicator*
5_BrazilEconomicGrowth_Centered.png
Source: Pictet Asset Management, Penn World Table, CEIC, Datastream. Real GDP data for Q1 2017; leading index data to May 2017; potential data to December 2017. * Our proprietary leading indicator is an aggregate of 11 Brazilian economic indicators.

Hopes for private consumption on the back of lower inflation

Private consumption is expected to emerge from historic lows. It should be helped by increases in real wages after a period of rapid and broad-based disinflation. 

Click here to find out more about Brazil's monetary policy.

Brazil - Back to a low-inflation environment
6_BrazilCPI-numbers.jpg
Source: Bloomberg, June 2017.

Brazil is showing real efforts to improve

Brazil still requires fundamental reforms to rebuild investor confidence over the medium to long term. Encouragingly, over 2015-2016, Brazil was the most responsive to OECD reform recommendations, with a 50% responsiveness rate. 
Emerging countries reform responsiveness rate*
6_ResponsivenessToReforms.png
Source: Pictet Asset Management, OECD, March 2017. * Enacted reforms as % of OECD recommendations.

Reform agenda focused on taming public deficit

The number one priority for the Brazilian government is to tackle public finances. This has led to:

  1. a cap on real public spending growth for the next 20 years.
  2. some tightening of the very high fiscal deficit (9.1% of GDP in April 2017 from a trough of 10.7% of GDP in January 2016)4.

Yet, public debt will rise to unsustainable levels unless Brazil takes further steps to consolidate its fiscal situation. These include a return to primary fiscal surplus through a range of reforms and controlling inflation to allow lower interest rates.

What remains to be seen is whether these reforms will be derailed by the latest in a long line of corruption scandals.

Public deficit decomposition: primary balance & interest payments
12-month moving average
8_BrazilFiscalDeficit.png
Source: Pictet Asset Management, CEIC, Datastream. Data to April 2017.
04

Market watch

Key market data
As at 30.06.2017
9_MarketData_Jul17.png
Source: Datastream, Bloomberg, data as at 30.06.2017 and in USD. Equity indices are quoted on a net dividend reinvested basis; bond and commodity indices are quoted on a total return basis. The currency rates evolution is treated as a performance calculation based on FX rates.