Emerging markets nearing an inflection point
The second half of the year may prove to be an inflection point for emerging market assets.
We anticipate that emerging nations will continue to grow, but at a slower pace, given unprecedented global upheaval and the idiosyncrasies of each economy.
With the eurozone approaching its decisive moment, and global growth stuttering, many will be studying both the emerging and developed markets for further signs of slowing growth and government intervention.
We currently believe there is an increased probability of additional non-standard monetary policy tools being utilised by both the Federal Reserve (Fed) and the European Central Bank (ECB). Meanwhile the People’s Bank of China has reduced interest rates again and has signaled its intention to maintain an increasingly accommodative stance if the economy in China continues to decelerate. In spite of some concerns about the impact of drought on agricultural commodity prices, inflation pressures are abating in most markets, which may help increase the pace of monetary easing in other economies such as India, Korea and Australia.
Global growth is slowing - this trend is underscored by a number of corporate earnings releases that suggest a more challenging business environment in Europe, China and even the United States, which had previously been seen as a relative safe haven. The recent downshift in US growth is being exacerbated by concerns about the prospective pace of budget belt-tightening (on both the spending and tax side) which might appear to be the responsible path, but which many – including Fed Chairman Ben Bernanke – warn might instead trigger another recession. Chairman Bernanke’s recent Congressional testimony and other commentary underscore his belief that the Fed’s dual mandate (“to promote effectively the goals of maximum employment [and] stable prices...”) probably authorises additional monetary stimulus. This is especially true given the softer tone of the economy and indications that any fiscal policy action would require cooperation by legislators that is extremely unlikely to occur in advance of the November elections.
Meanwhile, eurozone leadership has taken to deploying more aggressive language to avert the dire consequences of a destabilising break-up of the euro currency and, by extension, the monetary union. The ECB lacks the broad authority possessed by the Fed, but Draghi has sufficient political support to engineer at least a temporary solution. Although Draghi specified that he would remain within the ECB’s existing mandate in taking aggressive action, significant accommodative steps within these parameters until German approval of the European Stability Mechanism in September should reduce the likelihood of the worst outcomes over the forecast period.