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Emerging Markets

Emerging Markets Monitor

Emerging Markets Monitor

August 2017

Patrick Zweifel, Chief Economist

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

What's really driving the EM growth recovery?

After years of slowing growth in emerging markets, EM commodity exporters seem to be leading the recovery since Q4 20151.
 
EM real GDP GROWTH: manufacturers  (ex-China)1 vs. commodity-exporters
1_EMexportersvsmanufacturer_bubble.png
Source: Pictet Asset Management, CEIC, Datastream, 01.04.2017

It's not just about exports

But while rises in exports and industrial production explain some of the strength of commodity exporters relative to manufacturers, there are other explanations.

Commodity exporters are also seeing stronger readings for gauges of consumer demand such as retail sales, car sales, real wages and consumer confidence.

Determinants of the EM growth acceleration since Q4 2015 
2_determinantsofEMgrowth_wide.png
Source: Pictet Asset Management, CEIC, Datastream, 01.05.2017

Consumer sentiment appears key to the recent recovery

It would be easy to assume that higher commodity prices have fuelled the recovery in commodity exporters (purple dots). However the scatter chart shows that not all of them have benefited: growth has bounced strongly for the largest countries, Brazil and Russia, but smaller countries like Columbia and Chile are lagging behind.

What our chart shows is that changes in consumer confidence have had a much closer association to shifts in real GDP growth since Q4 20152.

This means consumer confidence could be the key indicator to watch for clues on where real GDP growth is heading.

For more on this subject, please see coverage we gained recently in the Financial Times.

Consumer confidence vs. GDP growth since Q4 2015
3_consumerconfidenceGDPscatter
Source: Pictet Asset Management, CEIC, Datastream, 01.04.2017

02

EM health check

EM activity gathers pace

Our proprietary leading indicator of EM activity3 shows a slight dip this month, but remains consistent with a pace of growth of 4.7%4 this year.

EM industrial production accelerated to 4.9% in July, its fastest pace in more than three years. It could accelerate further: our aggregate index of PMI surveys for EM is at a level consistent with industrial production growth of 5.3%5.

EM leading indicator & GDP (left) / EM PMI & industrial production (right)
4_EMLeadingIndicator_PMI_Centered.png
Source: Pictet Asset Management, CEIC, Datastream. 31.07.2017

03

In focus: Indonesia

Indonesia_EM-Monitor
Jakarta skyline, Indonesia

Not so fragile

In 2013 Indonesia was one of the so-called “Fragile Five” emerging countries. It has since made a major comeback. In May its sovereign debt was upgraded to investment grade for the first time since the Asian financial crisis in 1997.

The country now has its best ranking in seven years in our proprietary Country Risk Index6. The country benefits from favourable demographics, a high investment-to-GDP ratio and broadly improved fundamentals.

INDONESIA COUNTRY RISK INDEX
5_IndonesiaRiskRanking_Centered.png
Source: Pictet Asset Management, CEIC, Datastream, 01.04.2017
The nation is seeing the fruits of structural reforms announced in recent years to improve the business environment, productivity and competitiveness. The country has climbed 15 places in the World Bank’s Ease of Doing Business index to 91st place.

Still a relatively closed economy

Indonesia’s relatively closed economy means it is somewhat immune to global economic cycle developments (compare its smooth GDP growth in the chart to Singapore's more cyclical evolution). It is not part of the Asian manufacturing supply chain, but is a top regional resource exporter, in particular to China (its primary sector accounts for 26% of GDP).

The rough with the smooth: evolution of Indonesia GDP vs. cyclical singapore
6_IndonesiaVsSingapore_Centered.png
Source: Pictet Asset Management, CEIC, Datastream, 01.04.2017

Improving outlook for Indonesian consumption

Indonesia has seen improving growth for the past two years as private investment and exports have significantly rebounded. Consumer spending has been disappointing (as measured by retail sales, see chart) but is expected to bounce.

Very high consumer confidence and improving labour conditions should support a recovery in Indonesia’s household spending in the second half of 2017. Meanwhile, contained inflation means monetary policy is expected to remain on hold this year.

Indonesian real retail sales & consumer confidence
7_IndonesiaConsumerConfRetailSales_centered.png
Source: Pictet Asset Management, CEIC, Datastream, 01.05.2017

Our EM Equity team's view: a booming e-commerce market

Indonesia is Asean’s unlikely e-commerce champion. It is the trade bloc’s fastest and largest growing online retail market. This is partly thanks to Chinese behemoths Tencent and Alibaba taking equity chunks of local players. Domestic companies are also proving adept at creating bundled ecosystem models.

The country has a clear attraction: it is the world’s fourth largest population, half of which is under 30. Crucially, Indonesia’s PPP-adjusted GDP per capita has only just passed the threshold level at which online retail sales normally inflect upwards (USD10,000).

Watch this space.

Ahead of the pack: Indonesia leads e-commerce sales growth
Total online retail-sales growth, 2016 (local currency)
8_IndonesiaEcommerce_centered.png
Source: CLSA, Euromonitor, eResearch,  US Dept of Commerce, 31.12.2016

04

Market watch

Key market data
As at 31.07.2017
9 Market data.png
Source: Datastream, Bloomberg, data as at 31.07.2017 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.