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Emerging Markets Monitor

Emerging Markets Monitor

June 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

Global growth is accelerating but we see room for more

The Pictet Regime Indicator tracks where different regions are in the business cycle, and shows the asset classes most in favour in each growth/inflation regime.

The Indicator shows that global economic growth may be accelerating but is still below potential while inflation remains low.

Best performing asset classes & regional positioning vs. business cycle environments
Pictet Regime Indicator
Source: Pictet Asset Management, June 2017.

 

EM manufacturers are still in Regime 4 but nearing Regime 1, which could soon have a positive impact on their equity and credit markets. 

Meanwhile EM commodity producers are just leaving Regime 3 as the largest of them (Brazil & Russia) are exiting recessions with declining inflation rates and more accommodative monetary policies. 

World GDP growth to be lifted by EM (ex-China & India) and the US in 2017

The soft patch in global activity since 2010 could end with world GDP growth poised to rebound to 3.0% in 2017 from 2.7% last year.

The chart below shows growth coming from two blocs:

  1. Emerging economies (ex-China & India), expecting their first acceleration after six consecutive years of decline.
  2. The US, to a lesser extent.
Contribution to World GDP growth by major regions - 2017 forecast
2 - 201706 - WorldGDPContribToGrowthByMajRegions_Centered
Source: Pictet Asset Management, CEIC, Datastream. Data to December 2016 and forecasts for 2017.

02

EM health check

We see three key drivers of EM growth

EM growth rose to 4.0% in Q4 2016. Based on latest data, our proprietary leading indicator1 of EM activity shows growth could accelerate at a stronger pace to reach 4.6%2 in six months. 

In manufacturing, EM industrial production rebounded to 4.6% in March and our EM PMI indicators have been trending upward since the Q4 2015 trough, in spite of a slight drop in April – all pointing to a further strengthening.

EM leading indicator & GDP (left) / EM PMI & industrial production (right)
3 - 201706 - EMLeadingIndicGDP_EMPMIIndustrialProd_Centered

Source: Pictet Asset Management, CEIC, Datastream. 
Left-hand chart: EM leading indicator data up to April 2017 and EM GDP data to November 2016.
Right-hand chart: EM PMI data to May 2017. Emerging industrial production data to March 2017.

1. More upside in private consumption in the emerging world

Latest retail sales figures show that consumption spending in EM has strengthened further (5.8% y/y from 4.6% in October 2016) yet remains below the long-term average. 
DM & EM retail sales
Volume, %Y/Y
4 - DMandEMRetailSales_Centered
Source: Pictet Asset Management, BIS, CEIC, Datastream. Data to March 2017.

2. Encouraging trend in private investment

EM private investment spending3 could be an even stronger growth engine for the next couple of years. After six years of decline, private investments rebounded to 2.6% in Q4 2016.

New orders  – in grey, typically a good leading indicator of future investment spending – point to a further strengthening.

EM private investment & new orders

EM private investments in volume terms, %Y/Y

5 - EMPrivateInvestmentAndNewOrders_Centered
Source: Pictet Asset Management, CEIC, Datastream. EM private investment data to November 2016; Emerging New orders forecast data to October 2017.

3. Strong EM exports

With world growth synchronised for the first time since 2010, external demand should continue to boost emerging growth, especially if investment spending recovers. Investment is the most trade-intensive GDP component.

EM exports have reached their strongest level since September 2011 in USD terms, which also reflects the recent weakness of the USD against EM currencies. However, the growth trend remains strong if we strip out the currency effect.

Emerging nominal exports
In USD bn, %Y/Y
6 - EMNominalExports_Centered
Source: Pictet Asset Management, CEIC, Datastream. Data to March 2017.
Click here to find out why we believe emerging markets offer fixed income investors the potential for attractive returns, including a comparison against developed market debt.

03

In focus: Pakistan

Back from the frontier
Panoramic view of Islamabad, Pakistan
Panoramic view of Islamabad, Pakistan

Pakistan left the MSCI Frontier Index to re-enter the MSCI Emerging Market Index on 31 May 2017. After nine years of absence it started with a 0.2% weight spread across six stocks1.

The move follows the unrelated upgrading by S&P of Pakistan's long-term debt rating to B in October 2016.

Pakistani fundamentals are still weak but have significantly improved after 3 years of reforms under an IMF programme which ended in September 2016.

Hopes based on the China-Pakistan Economic Corridor

China-Pakistan Economic Corridor (CPEC)

Key facts

Pakistan statistics
Source: Pictet Asset Management, June 2017

A key support for Pakistan is the rising infrastructure budget related to the China-Pakistan Economic Corridor (CPEC).

CPEC is a project largely financed by China which was announced in April 2015 and should be completed by 2030.

It is expected to boost Pakistani infrastructure, development & growth by eliminating power shortages, boosting construction and related industries, improving connectivity thus stimulating investment and the transport sector and attracting Foreign Direct Investment (FDI) from industries (mainly Chinese?) seeking lower-cost locations.

 

Find out more about the CPEC project by visiting the official website.

Where is Pakistan in the business cycle?

Pakistan's economy is showing positive signs, with a rebound in private consumption since July 2016 on rising consumer confidence. Industrial production has also picked up and imports surged on the back of the CPEC project. 

CPI inflation remains below target, leaving the prospect of unchanged rates for the rest of the year.

Pakistan industrial production (left) / Pakistan real imports  (Right)
Industrial production in %, Y/Y; real imports in % Y/Y, 3-month moving average
PakistanInTheBusinessCycle_Centered

Left-hand chart:
Source: Pictet Asset Management, Penn World Table, CEIC, Datastream. Data to March 2017.

Right-hand chart:
Source: Pictet Asset Management, CEIC, Datastream. Data to April 2017.

04

Market watch

Key market Data
As at 31.05.2017
9 - MarketData_20170531
Source: Datastream, Bloomberg, data as at 31.05.2017 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.