The Implications Of Ongoing Weak EM Credit Growth

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.

China: The Feedback Loop Of A Bull Market

The tug of war between growth and policy reflation will remain the dominant theme this year, in which weak growth numbers will force policymakers into more aggressive reflation efforts. This is already turning out to be good news for stock prices. Indeed, even though the equity market in China is far less important than in developed countries, rising stock prices will still offer important benefits for the economy.


Rising stock prices increase household wealth and boost confidence, which in turn supports consumer demand. This could be true everywhere, but may have just started to become relevant for China, given the rapid increase in investors’ participation in the equity market in recent years. The numbers of investor accounts in the Shanghai Stock Exchange recently hit 125 million, almost triple the level in 2007 during the previous equity mania. This amounts to over 16% of the urban population, compared with a mere 6% eight years ago. Meanwhile, there has been explosive growth in investment funds in recent years, which has also increased households’ exposure to the equity markets.

The chart above shows that consumer confidence has surged to its highest level in recent years, a highly unusual development considering the weak growth environment. We suspect this has to do with the sharp rally in stock prices and growing participation in stock equity investment. Rising consumer confidence will eventually benefit retail sales.

From policymakers’ perspective, however, a much more important consideration is the funding mechanism of the stock market.