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Emerging Markets

Emerging Market Monitor - our forecasts

January 2018

Patrick Zweifel, Chief Economist

Of all regions, Latin America is the most promising.

After the excesses of the holiday period, this month's EM Monitor looks at what’s in store for emerging markets on the growth and inflation front.

ANOTHER GOOD YEAR LIKELY FOR EM ASSETS

We see three key drivers underpinning growth across emerging markets in 2018.

Fig.1. Key drivers of global growth likely to support EM growth
global growth drivers
Source: Pictet Asset Management, January 2018.

Changing gears

What trends will be at play?

First, we should continue to see growth accelerate for commodity exporters, with real GDP growth reaching 3.0 per cent in 2018 vs. 2.1 per cent in 2017. Meanwhile, EM manufacturers should see lower growth, as China’s growth rate cools.

Fig.2. Real GDP growth change: 2018 forecasts less 2017 estimates (%Y/Y)
GDP growth 2
Source: Pictet Asset Management, CEIC, Datastream, December 2017

The return of Latin America… 

The second and most noticeable trend will be the recovery in Latin America, where we expect to see the strongest bounce (see Fig.2. above).

Brazil, its largest economy, should see the biggest rebound in growth (from 0.6 per cent in 2017 to 2.6 per cent), as it emerges from a severe recession. Meanwhile Peru, Chile, Colombia, Mexico and Argentina should all record higher real GDP growth.

Growth momentum appears less strong in EMEA. Real growth is expected to drop to 2.9 per cent in 2018, from 3.4 per cent in 2017, with Turkey the laggard. 

Asia ex-Japan’s prospects are somewhere in between. India’s growth should rise from 6.3 per cent to 7.5 per cent, but inflation is also rising (see next section). Other markets in the region however are likely to see flat or slowing growth profiles. In particular, China’s growth is seen slowing from 6.8 per cent to 6.6 per cent.

The other side of the coin: inflation

We expect overall EM inflation to increase to 3.5 per cent, from 3.3 per cent in 2017. There will be a marked divergence between manufacturers, who will see inflationary pressures, and commodity exporters where inflation should decline to 5.9 per cent, from 7.2 per cent.
Fig.3. Inflation change: 2018 forecasts less 2017 estimates (%Y/Y)
Inflation growth 2
Source: Pictet Asset Management, CEIC, Datastream, December 2017


At the country level, India is where we expect inflation to rise the most (from 3.5 per cent to 5.3 per cent). This somewhat tempers our optimism around the country's real growth prospects (Fig.2).

On the other hand, Argentina is where we see the strongest drop in inflation, admittedly from very high levels of 24 per cent  in 2017 to 18 per cent in 2018.

Our growth and inflation forecasts by region

Fig.4. Latin America: top of the class
LatAm Table
Source: Pictet Asset Management, CEIC, Datastream, December 2017. * 2017 data are estimates. ** 2018 data are forecasts.
Fig.5. Asia: Steady progress
Asia Table
Source: Pictet Asset Management, CEIC, Datastream, December 2017.  * 2017 data are estimates. ** 2018 data are forecasts.
Fig.6. EMEA: Slowing momentum
EMEA table
Source: Pictet Asset Management, CEIC, Datastream, December 2017.  * 2017 data are estimates. ** 2018 data are forecasts.

THE VIEW FROM OUR EM EQUITY TEAM

By Klaus Bockstaller, Head of Global Emerging Markets (Value)
LatAM EM Monitor fullbleed

Emerging equities in 2018 - value or growth?

Value stocks have lagged growth stocks in emerging markets for the past five years, but this might be about to reverse.

History shows that EM value stocks tend to outperform when EM real growth exceeds that of the developed world. This is shown in Fig.7. below, where the differential in performance between value and growth stocks (grey line) closely follows the real growth rates differential between the emerging and the developed world (green line). However the recovery in the green GDP line last year has not yet been matched by a recovery in EM value stocks. 

Fig.7. EM value vs. EM growth, real GDP growth in EM vs. DM

 

EM Value
Source: Pictet Asset Management, CEIC, Datastream, December 2017

Two factors could be at play. One is that investors possibly remain sceptical around the prospects for EM GDP growth. The other is that the strength of investor belief in tech stocks is still driving EM growth valuations. 

We think this might be about to change, as the outlook for EM GDP growth is strong and improving, as already discussed above. This comes at a time when valuations of EM growth stocks look ever more stretched. 

Investors in emerging markets should take a closer look at value stocks.

MARKET WATCH

Stephane Couturier for Pictet
Key market data
31/12/2017
Market Watch
Source: Datastream, Bloomberg, data as at 31/12/2017 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.