EMs Find New Life After Brexit
World Economy

EMs Find New Life After Brexit

The Brexit vote has pushed out Fed tightening and has effectively neutralized the strong US dollar. This looks to be a helpful boost for emerging markets. Is this the beginning of a long-awaited turn in EM momentum?
George Iwanicki, emerging markets macro strategist, JP Morgan Asset Management, looks at the possibilities.
In the changed (and in some ways charged) post-Brexit environment, investors are reassessing the prospects for EM equities. They are asking, in particular, whether those early signs of a momentum shift will strengthen or fade in the coming quarters, FTSE reported.  
The trajectory of the US dollar plays a critical role. In light of our long-standing concerns about the impact of USD strength on EM fortunes, "we are encouraged that the post-Brexit USD bounce has been limited. We are encouraged, too, that fears of a stall in globalization—fears that well pre-date the Brexit vote—look exaggerated."
Through all the market tumult of 2016, emerging markets, and Asia Pacific in particular, have held their own. Indeed, EM equities outperformed global equity indices during the first half of the year.
In the second quarter, EM growth and earnings estimates began to signal early positive momentum—a welcome shift amid a backdrop of only modest global growth. (Along with a strong USD and weak commodity prices, sluggish growth has been one of the three major headwinds for emerging markets.)

Earnings Expectations
Diminished downward pressure on earnings estimates could be seen in both the magnitude of earnings revisions and the breadth of those revisions (the number of company estimates revised up vs. revised down). In short, we see hints of improvement in earnings expectations.
Going into the Brexit vote, this tentative optimism was tempered for some investors by concerns that globalization had already stalled. Certainly, the era of rapid globalization and intensified trade that began in the late 1980s suffered a major correction in the global financial crisis.
More significant is the trend underway in global capital flows. Current account balances are beginning to diverge between emerging markets and developed markets. Slower growth, coupled with cheaper currencies, is prompting a rising EM aggregate current account surplus.

USD Rally
Any analysis of Brexit and globalization for an EM investor must ultimately focus on the central importance of the US dollar. "We’ve suggested that despite a sharp retracing in the dollar, the multi-year USD rally is pausing and might yet experience one last leg of appreciation.
"Today we are more confident that the pause will be extended, although we still expect one more upward move in the US dollar. The Brexit vote and concerns about downside risks to global growth have pushed out expectations of Fed tightening. For the foreseeable future at least, it looks like a significant threat to emerging markets—a strong USD—has been defused."
After the multi-year ascent of USD, the vast majority of EM currencies remain "moderately below our best estimates of fair value". But the pause in USD since the late January peak has reduced the degree of FX undervaluation for much of the EM basket.
The two currencies that had flirted most recently with “hyper cheap” valuations, the Russian ruble and the Brazilian real, re-rated in Q2 along with an upward move in commodity prices. The real now tilts slightly expensive; in comparison, the ruble looks measurably cheaper.
"After the Brexit vote, the USD unsurprisingly caught what we might call the 'safe reserve currency' bid." Unexpectedly, though, the currency that really caught that bid was the Japanese yen. The big rebound in JPY has effectively pushed the yen back to fair value, despite Japan’s negative interest rate policy and aggressive quantitative easing.
"As we distinguish among EM countries for investment prospects, we look for cheaper markets with positive trends. We like South Korea, where favorable valuations and momentum have now been accompanied by relief for exporters (who benefit competitively from a rallying JPY). In Eastern European markets, we still like Turkey and Russia.
"Among what we call “the reform markets” (India, Mexico, the Philippines, Indonesia), equities seem to remain fairly aggressively priced in relative terms even though several have experienced either political or policymaker change."

Short URL : http://goo.gl/rEyuZR
  1. http://goo.gl/n9iPqd
  • http://goo.gl/3Zmnkq
  • http://goo.gl/eMpeJi
  • http://goo.gl/5LF4yB
  • http://goo.gl/IjpVSo

You can also read ...

Philippines May Suspend Excise Taxes on Petroleum Products
The Philippine government will suspend the collection of...
Jordan Approves New IMF-Guided Tax Law
Jordan’s cabinet on Monday approved major IMF-guided proposals...
US, China are nearing a deal to remove American sales ban against ZTE.
US President Donald Trump retreated from imposing tariffs on...
At present, the majority of investments are still being done in oil-gas and traditional industries while there is still almost no SME sector in the country.
While Saudi Arabia’s latest budget figures show progress in...
Dubai Bank to Buy Turkey’s Denizbank for $3.2 Billion
Dubai’s biggest lender the National Bank of Dubai has agreed...
SBI Reports Record $1.1b Loss
State Bank of India reported a loss of Rs. 7,718 crore ($1.1...
IHS Markit to  Buy Rival Ipreo  for $1.8 Billion
Data firm IHS Markit Ltd. said it will buy smaller rival Ipreo...
Catalonia Main Risk to Spain Growth
The political situation in Catalonia is one of the main...