Since the peak back in April, most EM equities markets have seen declines or consolidation (top-left chart). The temptation is to view this as a buying opportunity to front-run more aggressive central bank easing (especially from eg the PBoC in China). Although we agree that the PBoC will need to ease policy to boost growth, there are still reasons to be cautious on EM assets in the interim.

The top-right chart shows our diffusion model of individual EM equity market forecasts, which leads MSCI EM by about 6 months. At present just over half of EM equity markets have positive expected returns; the diffusion indicator is bottoming, but it is not yet turning up strongly enough to warrant an EM overweight. MSCI EM performance is also highly correlated with relative money growth between EM and DM (bottom-left chart) and global trade (last chart). DM central banks, led by the ECB, are pushing up real money growth, while EM central banks have been less aggressive in comparison, removing a key support for EM assets. Additionally, the retrenchment in global trade is driven as much by an organic global economic slowdown as well as populist politics within several DM countries. Thus, a rebound in global trade will likely be more difficult now than when globalisation was viewed more positively. We continue to prefer DM over EM.

(Click on image to enlarge)

Source: Bloomberg, Macrobond, Variant Perception