At GAM Investments’ Weekly Investment Meeting held on 22 May 2019 the speaker was Michael Biggs who outlined his latest views on the macro outlook and EM local debt.
Macro Overview/ Emerging Market Debt
We believe the prospects for a US recession are low. US new borrowing levels remain at modest levels and growth in the US should slow to around 2%, which keeps the story on track in our view.
Meanwhile in China, lending strengthened in Q1. The positive credit impulse should have the effect of boosting property sales; the impact is now becoming evident on Chinese imports, which are rising, to the benefit of Asian exports to China.
Yet global growth remains weak. Global export volume growth has hit post-crisis lows and global industrial production has weakened, largely due to emerging market (EM) Asia. The final part of the equation is that Asian export volumes tend to be correlated with semiconductor sales. A good indicator for this is dynamic random-access memory (DRAM) prices, which have been shown to follow the China Purchasing Managers’ Index (PMI), albeit with a lag. In our view, an improvement in semiconductor sales is required to boost EM export volumes; we are hopeful this could come through in Q3.
For EM local debt, two fundamentals are very important: global growth and the EM balance of payments. The current account status is key. When EM is running a current account deficit, average returns over the following two quarters are typically flat to mildly negative and FX volatility is high. When EM is running a current account surplus, on the other hand, average returns tend to be positive and the FX range is usually much tighter.
The EM current account is currently in healthy surplus, although a deterioration in the trade balance in April, attributable to Asia, suggests some possible risks for Q2. A turnaround in growth and export volumes, as well as a stable US dollar, may be required to trigger the next leg of the rally.
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