6 Apr 2015
The bearish EM narrative is clashing with reality – Nomura
FXStreet (Barcelona) - Research Analysts at Nomura, argue that extreme bearishness for EM echoed recently is far from suggesting the reality, with the stable EM financial markets expected to support growth overtime.
Key Quotes
“On Wednesday, the FT had a front page story about accelerating capital outflows from emerging markets. But they used a flawed metric of capital flow (including the level of FX reserves, which is driven more by the valuation effect from the euro’s decline than anything EM-specific).”
“Moreover, we continue to have a steady stream of stories harping on the unsustainable burden of USD debt in hard currency in emerging markets.”
“Our Global EM Pressure Index, which combines FX intervention with FX price action, shows that pressure on EM currencies has been easing since October 2014. We track EM capital flows and EM reserve dynamics closely, and we do not observe any accelerating signs of weakness.”
“Second, there is no uniform evidence of accelerating tension in EM asset markets.”
“EM equities are starting to outperform. A simple way to look at this is to observe how the EEM ETF (which is measured in USD) has traded this year relative to the S&P500. It traded essentially with the S&P500 until mid-March, but has since outperformed by 6.2%.”
“For the year, EM stocks rallied by 2.8% year to date, while US stocks are up by merely 0.5% and DM equities on average are up by 1.7%. Moreover, flow indicators have been recovering over the last 2-3 weeks.”
"EM local currency bonds have generally rallied strongly over the last several months, with the exception of bond markets in Russia and Brazil"
“If EM financial markets are relatively stable (or even rallying) then it will support growth over time, especially if you take into account currency depreciation, which will have a positive effect through net trade.
Key Quotes
“On Wednesday, the FT had a front page story about accelerating capital outflows from emerging markets. But they used a flawed metric of capital flow (including the level of FX reserves, which is driven more by the valuation effect from the euro’s decline than anything EM-specific).”
“Moreover, we continue to have a steady stream of stories harping on the unsustainable burden of USD debt in hard currency in emerging markets.”
“Our Global EM Pressure Index, which combines FX intervention with FX price action, shows that pressure on EM currencies has been easing since October 2014. We track EM capital flows and EM reserve dynamics closely, and we do not observe any accelerating signs of weakness.”
“Second, there is no uniform evidence of accelerating tension in EM asset markets.”
“EM equities are starting to outperform. A simple way to look at this is to observe how the EEM ETF (which is measured in USD) has traded this year relative to the S&P500. It traded essentially with the S&P500 until mid-March, but has since outperformed by 6.2%.”
“For the year, EM stocks rallied by 2.8% year to date, while US stocks are up by merely 0.5% and DM equities on average are up by 1.7%. Moreover, flow indicators have been recovering over the last 2-3 weeks.”
"EM local currency bonds have generally rallied strongly over the last several months, with the exception of bond markets in Russia and Brazil"
“If EM financial markets are relatively stable (or even rallying) then it will support growth over time, especially if you take into account currency depreciation, which will have a positive effect through net trade.