The “New, Normal” In EM Ex-China

EM economies ex-China are slowing to a “new, normal growth” phase, which will keep bulks and base metals under pressure this year and next. These economies join China in a broad-based EM slow-down, which will increase the supply-side slack in metals generally, and stretch out supply and inventories globally.

Private and public spending is ratcheting lower in EM ex-China markets. Real capital expenditures dipped into negative territory year-on-year as 2014H2 opened, while real private consumption decelerated to ~ 3% y-o-y.

Slowing EM Spending And Capex Will Pressure Industrial Commodities


Coupled with China’s “new, normal growth,” which we discussed last week, this provides another indication commodity price pressure will remain contained for the balance of this year and next. In addition, it raises the odds of a eurozone recession, to which the IMF last week assigned a 40% probability. This would hit commodity prices harder than markets expected earlier this year: EM growthwill no longer offset DM slack.

Euro Area: Potential For Upside Surprise?

Recent client visits uncovered that investors are uniformly bearish on Europe. What could go right?


We offer two potential candidates for upside surprises in Europe:

  • European banks have been hesitant to lend ever since the AQR/stress-test exercise was announced at the end of 2012. Our view is that most banks will likely pass the test (results are expected at the end of this month), largely because of the severe deleveraging undertaken throughout late 2013. This would relieve a serious constraint on the supply of credit and risk assets should benefit.
  • At present, there is a small projected fiscal drag for the euro-zone next year, but the most likely outcome is that this is reversed. Our geopolitical strategists remain convinced that Europe is slowly developing a consensus around the quid pro quo of structural reforms in exchange for the end of austerity. The current pace of fiscal consolidation is simply politically unsustainable, as recent Pew polls clearly illustrate.

Bottom Line: Extreme bearishness on Europe invites a contrarian stance and suggests that any slight policy surprise could cause a positive reaction in euro area equities. Stay tuned.