Export volumes should pick up to become more constructive on emerging markets – Standard Chartered

Analysts at Standard Chartered explains that we need to see export volumes pick up to become more constructive on emerging markets.

Key Quotes

“However, this seemingly constructive backdrop has led a number of clients to ask whether we are now in fact entering a self-sustaining positive EM environment similar to 2004-07. At that time the Fed gradually hiked rates, but a strong (and strengthening) global growth environment effectively ‘lifted all boats’ in emerging markets as stronger exports offset the implicit costs of higher USD funding rates.”

“A number of key drivers of the 2004-07 EM rally have improved lately – EM growth has started to recover versus DM growth, EM current accounts are improving, EM exports are picking up and the breadth of EM export growth is wide (i.e., most emerging markets now have positive y/y export growth).”

“While none of these are at 2004-07 levels, there has been significant improvement and a move to 2004-07 levels seems, at least superficially, feasible.”

“However, we note one striking difference between now and 2004-07 – namely, the components of export increases. Specifically, all that has happened so far is that export prices have returned to positive y/y growth as commodity prices recovered, after double-digit y/y declines during 2015 and H1-2016. Export volumes have increased only marginally, if at all, so far and remain around 3% y/y.”

“While we recognise the improvement in relative growth, current accounts and export values, we do not think this signals that we have entered a self-sustaining 2004-07 scenario. Rather, we think these are reasons for not being outright short emerging markets; instead we recommend being short emerging markets but also seeking EM relative-value opportunities. We currently forecast significant outperformance versus forwards over the next 12 months for ARS, MYR, RUB and MXN. We also see scope for BRL and IDR to slightly outperform the forwards.”

For us to become more constructive on emerging markets and start to consider a return to 2004-07’s scenario, we need export volumes to improve while UST real rates and term premia continue to trade sideways.