Thought of the day
04.08 - Is the emerging market train set to slow?
Emerging market (EM) stocks have been a star performer in the first half of the year. The MSCI EM index returned 26%, with 30% from emerging Asia, nearly double the total return on the global index.
But while conditions remain positive for EM, we expect a more muted performance in the remainder of 2017. The momentum of profit growth appears slowing. Earnings per share increased by 10% in the first half of the year. We expect this to decelerate to 3–5% over the final six months of 2017.
- The recovery in growth and business activity is moderating. China, the largest emerging economy, expanded faster than expected in the first half, with GDP growth of 6.9%. Top government leaders and regulators have signaled deleveraging efforts will resume in the second half, with full-year growth tracking at 6.7%. For emerging markets overall, we have seen the expansion of business activity peaking, with the Markit Emerging Market manufacturing purchasing managers' index at 50.9 for July, down from a peak in March of 51.6.
- Concerns over less accommodative central bank policy could dampen EM enthusiasm in the second half of the year. EM stocks were supported by more dovish statements by the Federal Reserve in recent months, and we now only expect the next rate hike in December. But through the second half of the year we should get more details on how the Fed will start to trim its balance sheet, and further guidance from the European Central Bank on tapering of bond purchases.
So, although we are optimistic on the outlook for emerging markets, we remain neutral on EM equities in our global tactical asset allocation.