Niall Paul

Market Outlook

Emerging Markets (Core) Outlook

Outlook

Latest Emerging Markets (Core) economic and market outlook. 

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The Fed has announced that it will start shrinking its balance sheet in October and stick with plans for further rate rises, marking a historic end to quantitative easing. The move is a vote of confidence in the US economic recovery, which continues apace. Meanwhile, President Trump is seeking to cut the country’s corporate tax rate from 35% to 20%. In a move long demanded by companies, he also plans to shift the US to a “territorial” system under which US companies would largely pay tax only on US earnings, rather than all of their worldwide income. The tax cuts, if passed by the end of the year, would drive a one-off increase of about 11.5% in US expected earnings for 2018. But before lawmakers can put forward tax reform legislation, the Republican-controlled Congress must pass a budget resolution, which would pave the way for Republicans to cut taxes without being thwarted by a Democratic filibuster. Of course, investors remain sceptical at this stage as Trump has so far failed to pass any major bill. 

Supply-side reform continues to drive consolidation and utilisation improvements in China’s ‘old economy’. This can be seen in the coal sector, where the market share of the largest 4 producers has risen from 50% in 2015 to 70% in 1H17. At the same time, China’s ‘new economy’ appears to be performing well. Revenue and earnings growth in New China rose 30% and 36% respectively in 1H17. This would suggest that ROEs have bottomed and margins have rebounded. Data paints a more nuanced picture of the Chinese property sector. On the one hand, home pricesand inventory levels indicate a healthy balance, while upward revisions to guidance from the major developers indicate an improving outlook. On the other hand, deteriorating credit data suggests that property demand could soften. We will continue to monitor the sector closely, given its importance to China’s wider economy.

The world’s major global economies are in the midst of the first synchronised acceleration since the Great Financial Crisis. This is good news for global growth and trade, and by extension for Emerging Markets. While there are concerns that Emerging Markets could struggle against a backdrop of rising US rates, this is simply not reflected in the data. Indeed, Emerging Markets have outperformed in 4 of the last 5 Fed hiking cycles. Thus, we expect EM outperformance to continue, particularly as the asset class offers exposure to strong economic growth in Asia, and cyclically improving growth in Latam and EMEA. Despite strong economic and earnings growth, EM equities trade at a 23% discount to their Developed Market counterparts on a P/E basis, and 28% in P/B terms. 

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