EM: Aggregate 2018 GDP growth forecast raised to 5.2% - Nomura

In view of analysts at Nomura, EM asset class has held up relatively well to the global equity rout and a simple reason is solid global growth.

Key Quotes

“EM has more open economies than DM and exports in particular benefit from solid, synchronised global growth and economic stability in China. Also, at this juncture the ECB and BOJ collective asset purchases remain a sizable counter to the Fed’s QE unwind, which should sustain the global hunt for yield in EM risk assets a while longer.” 

“From a month ago, we have raised our aggregate EM 2018 GDP growth forecast from 5.1% to 5.2% due to an upgrade to our China growth forecast as we have been impressed by the smooth progress made so far in financial deleveraging. However, risks remain. In India, we continue to expect a V-shaped recovery, while we are above consensus on growth in Indonesia.”

“In EEMEA, South Africa’s political transition is ushering in a growth rebound, in Russia the stage is set for sizable rate cuts, the CEEs face rising inflation pressure, while we remain concerned about Turkey’s weak fundamentals and geopolitical tensions. In LatAm, we have a rising conviction that a meaningful growth recovery is unfolding in Brazil, while Mexico’s outlook remains highly uncertain due to NAFTA negotiations and the 1 July presidential election.”

“While we are relatively sanguine on EM over the next few months, further out we are more concerned about a deeper and broader EM asset selloff. The simple point is that just as QE was successful in pushing global investors into riskier higher-yielding EM assets, the unwind of QE should have the opposite effect, but probably in a more nonlinear fashion because of the large build-up of EM debt and how quickly market liquidity can evaporate.”

“An early warning indicator that we are monitoring closely is corporate credit spreads – EM’s Achilles heel – as a large widening could see significant EM corporate dead wood rise to the surface after such a protracted period of low interest rates. If we were to hazard a guess we would point to late Q2 or early Q3 as a high-risk period for EM when aggregate QE by the Fed, ECB, BOE and BOJ will be coming to a close, when global growth may start to lose some steam, including in China, and when President Trump likely starts to ramp up America First policies ahead of mid-term elections.”