With emerging market (EM) currencies having depreciated considerably and numerous EM central banks cutting interest rates, many clients have been asking whether EM monetary conditions have already eased enough for their economic growth to accelerate. A recent Special Report by our Emerging Markets Strategy service concludes that EM monetary conditions in aggregate remain restrained and the money/credit impulses are negative for the majority of countries.
Among the major conclusions:
- Both in China and EM ex-China, the money/credit cycle will be a drag on growth in the next six to nine months.
- EM central banks have to ease policy much more aggressively and their currencies have to depreciate further to relax monetary conditions sufficiently to turn up the money/credit cycle and eventually produce a growth recovery in output/profits.
- For now, asset allocators should continue to underweight EM equity and credit markets relative to their G7 counterparts in general and the U.S. in particular.
- Absolute-return investors should stay defensive on EM stocks and credit markets.
- EM currencies have more downside barring a potential short-term bounce from very oversold conditions. Stay short a basket of the following currencies: BRL, COP, CLP, ZAR, TRY, KRW and IDR.
- EM local interest rates, especially the long end of their curves, will drop, reflecting accumulating deflationary pressures and weak growth. Continue to receive long-term rates or stay long local bonds while hedging currency risk in Korea, Malaysia, Poland, Mexico, the Philippines, Colombia and Chile.
Clients interested in reading the full Report can access it here: EM: Monetary Conditions And Money/Credit Impulses.