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
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)
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)
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
Source: Pictet Asset Management, CEIC, Datastream, December 2017. * 2017 data are estimates. ** 2018 data are forecasts.
Fig.5. Asia: Steady progress
Source: Pictet Asset Management, CEIC, Datastream, December 2017. * 2017 data are estimates. ** 2018 data are forecasts.
Fig.6. EMEA: Slowing momentum
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)
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
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
Key market data
31/12/2017
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.
Read more about emerging markets and market outlook
Patrick Zweifel joined Pictet in 1997. He is Chief Economist at Pictet Asset Management. Before assuming his current position in 2009, he was head of the “Macro Research Team” at Pictet Private Wealth Management. In particular, he had economic research responsibility for emerging markets and Japan, and for the development of quantitative models on major asset classes, primarily foreign exchange models. Before joining Pictet he was a research assistant in econometrics and monetary theory and worked on international research projects for the World Bank and the European Union. He holds a PhD in econometrics from the University of Lausanne.
About
Anjeza Kadilli
About
Anjeza Kadilli
Anjeza Kadilli joined Pictet in 2015. She is an Economist in Pictet Asset Management’s Economic Analysis team where she conducts macroeconomic analysis of emerging markets with a special focus on Latin America. Anjeza holds a PhD in Econometrics from the University of Geneva - where she also obtained an MSc and BSc in Economics. During her PhD, Anjeza spent time at the University of Southern California, Riksbank and HEC Montreal as a visiting scholar.
About
Nikolay Markov
About
Nikolay Markov
Nikolay Markov joined Pictet Asset Management in 2013 as an Economist in the Fixed Income department.
Before joining Pictet, he was working in the Monetary Policy Analysis Unit of the Swiss National Bank where he performed research on monetary policy rules for Switzerland. Prior to working at the Swiss National Bank he was a teaching and research assistant at the University of Geneva and participated in international academic conferences.
Nikolay holds a PhD in Economics from the University of Geneva and obtained a PhD program certificate from the Swiss National Bank doctoral institute in Gerzensee.
About
Klaus Bockstaller
About
Klaus Bockstaller
Now well into his third decade as a value investor in emerging equities, the breadth and depth of Klaus Bockstaller’s market experience are an invaluable asset to the Emerging Equities team. Klaus has steered the Global Emerging Markets Value strategy since he joined Pictet Asset Management in 2009. He is the lead portfolio manager for the strategy, working with portfolio managers John Moorhead and Hugo Bain. Klaus holds a Master's degree in Economics (Diplom Volkswirt) from the University of Freiburg.
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