Is The Worst Over For Emerging Markets?

 
 

Forecasters are far from bullish, but analysts suggest the worst may be over for emerging markets following a rally in commodities and currencies.

In its latest “World Economic Outlook” report, the International Monetary Fund revised down its forecasts for global growth to just 3.2 percent this year and 3.5 percent in 2017, citing only a modest pickup in advanced economies and mixed prospects across emerging and developing economies.

“While emerging markets and developing economies will still account for the lion’s share of world growth in 2016, prospects across countries remain uneven and generally weaker than over the past two decades,” the Washington-based lender said, projecting only a modest rise in their growth rate to 4.1 percent this year and 4.6 percent in 2017, down 0.2 and 0.1 percentage points from its January forecasts.

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The IMF warned of slowing growth in oil exporters, China’s “modest” slowdown, deep recessions in Brazil and Russia and diminished growth prospects in many others. However, it said India remained a bright spot, with strong growth and rising real incomes, while the “ASEAN-5” economies of Indonesia, Malaysia, the Philippines, Thailand and Vietnam were also “performing well.”

While China is seen slowing from 6.9 percent gross domestic product (GDP) growth in 2015 to 6.5 percent this year and 6.2 percent in 2017, the IMF actually increased its projections by 0.2 percentage point compared to its previous forecasts. India is seen posting 7.5 percent GDP growth this year and next, while the ASEAN-5 should improve to 4.8 GDP growth in 2016 and 5.1 percent next year, unchanged from the January forecasts.

Similarly, the World Bank suggested in its latest projections that growth in developing East Asia and the Pacific “has remained resilient and is expected to ease only moderately during 2016-18.” It said the region’s growth rate would ease from 6.5 percent in 2015 to 6.3 percent this year and 6.2 percent in 2017, reflecting China’s slowdown to an expected 6.7 percent this year and 6.5 percent in 2017.

“Developing East Asia and Pacific continues to contribute strongly to global growth. The region accounted for almost two-fifths of global growth in 2015, more than twice the combined contribution of all other developing regions,” the World Bank’s Victoria Kwakwa said, pointing to policymakers’ “careful macroeconomic policies.”

Across the region, the Philippines and Vietnam are seen as having the strongest growth prospects, with both forecast to post more than 6 percent GDP growth this year. However, the report noted the risk of slower than expected global growth, a sharper slowdown in China and high corporate and household debt in some of the larger economies.

Nevertheless, buoyed by the U.S. Federal Reserve’s apparent slowing of its interest rate hikes and China’s stimulus efforts, emerging economies have shown signs of a turnaround.

In March, emerging market currencies had their best month in 18 years due to the Fed’s more gradual approach to monetary tightening, boosting stocks and currencies of commodity producers including Malaysia. As noted by Pacific Money, Beijing’s credit binge has helped steel and iron ore prices surge, while the oil price has also moved higher for three straight weeks amid signs of an easing in the global supply glut.

“The current rally is driven by a market sentiment that is becoming more and more convinced that the worst is over and the global oil market rebalancing process is already in play,” Energy Management Institute’s Dominick Chirichella told Reuters.

Chinese speculators reportedly have rushed back into commodities, sparking warnings from Chinese stock exchanges to investors. According to Bloomberg News, contracts on more than 223 million metric tons of rebar were exchanged Thursday, more than China’s full-year production of the concrete-strengthening material.

“The great ball of China money is moving away from bonds and stocks to commodities,” Tebon Securities analyst Zhang Guoyu was quoted saying. “We’ve seen a lot of people opening accounts for commodities futures recently.”

Nikko Asset Management (Nikko AM) has projected gains in both Japanese and other Asian equities in 2016, forecasting rises in both Hong Kong and Australian stocks as confidence increases in the Chinese economic outlook.

Peter Sartori, head of Asian equity at Nikko AM, told Morningstar that Asian equities could see further gains by year-end despite gloomy sentiment by overseas investors.

“The starting point is pretty depressed with a lot of bad news priced in. I think there could be a few surprises in terms of the benefits finally flowing through from lower oil and commodity prices, and if China can get back on the front foot in implementing reforms, then that could be a real positive surprise,” he said.

‘Slow And Painful’

While stating that the recovery in emerging markets (EM) will be “slow and painful,” BMI Research has suggested that they have at least reached a turning point, with commodity prices having “bottomed out” and seen heading higher.

“The U.S. dollar has topped out, alleviating pressure on EM currencies, commodities have based, and a range of EM assets have rallied significantly in recent months. Furthermore, in several EM bellwethers there are undercurrents of political crises – most notably in Brazil and South Africa – which could precipitate much-needed policy changes and lay the foundations for future growth,” the international forecaster said.

BMI Research said India, Indonesia and the Philippines were among those emerging markets in an “upswing phase of the economic cycle,” appearing “relatively robust in terms of growth prospects and macroeconomic fundamentals.”

However, it said “the commodity exporters and reform laggards are still locked into a slowdown to a greater or lesser extent. The oil exporters are suffering severely depleted government budgets and debt issuance is being ramped up as a consequence.”

The research group rated India top in its reform progress with an eight out of 10, with Indonesia earning a six.

“India is one of our favored EM economies and is by far the strongest of the BRICS. The economy will continue to benefit from the Modi administration’s gradual reforms and demographics will remain a major tailwind. But state-owned banks are plagued by weak asset quality and cautious lending could keep credit growth subdued,” it said.

However, China, Malaysia and Thailand earned only a five out of 10 for their reform efforts, with BMI Research criticizing “excessive government-led credit growth” and “unproductive state-owned enterprises” in China and elsewhere.

“[Emerging market] corporate debt levels have surged over recent years, and China is in a league of its own in this respect. If companies get into distress, a feedback loop would likely run between corporates, banks and the sovereign. In China’s case, the highest risks lie in the sectors suffering overcapacity such as coal, steel and cement. Many of the companies involved are rated ‘AA’ and above by domestic rating agencies, but transparency is lacking at the state-owned enterprises and there could be skeletons in the closet,” it said.

BMI Research said China needed “sweeping structural reforms” but they were being blocked by political imperatives. Over the next five years, it said there was a 50 percent possibility of a severe downturn in China, but with a 30 percent chance of continued stimulus exacerbating structural deficiencies.

Overall though, the forecaster said it did “not see the case for a sustained bull market in either equities, bonds or currencies. Macroeconomic fundamentals will improve at a slow pace and it is difficult to identify EMs that do not have considerable structural weaknesses such as gaping fiscal deficits, current account shortfalls and rising debt levels.”

In the meantime though, Asia’s emerging economies are enjoying the improvement in sentiment following the doomsday scenarios of early 2016, when warnings of another global financial crisis rocked markets. The challenge now for policymakers is ensuring the pickup continues.

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