EM: Show me the slowdown - BAML

The key question that EM investors are facing is whether growth will slow down in H2 2017 as economic surprises in US and Asia have been rolling over, notes the analysis team at Bank of America Merrill Lynch.

Key Quotes

“Our China economists believe that the cyclical growth momentum has likely peaked and will weaken in H2 as the impact of policy tightening kicks in.”

“However, this is still not being reflected in the equity markets yet giving rise to the equity/bond disconnect that we have previously addressed. In Asia, ever since economic and inflation numbers have started to surprise to the downside, we have debt inflows outpace equity inflows considerably. India and Indonesia local currency bond markets are reporting the highest YTD inflows recorded in the last 5 years.”

“One possible explanation for risk sentiment still remaining buoyant is that Asian economic surprises have not fallen as much and perhaps might even be offsetting the drop in US economic surprises. This makes the upcoming numbers for Asia particularly important, especially now that policy uncertainty indices of Asia and US remain elevated. This divergence of economic and market variables makes us cautious on which way markets will unravel especially when market positioning is very much consensus and crowded.”

“That said, for now, we continue to remain bullish on INR and IDR against SGD and KRW in Asia. In EMEA, even though Russia remains fundamentally strong, we are recommending hedging against short term weakness with RUB put spreads. We see scope for recovery in TRY and are bullish Zloty on a medium term basis. Finally, in LatAm, we still like ARS despite FX intervention while CLP is our favorite short. MXN and BRL are expected to remain volatile.”