EM correction – Watch out for 5 triggers


27 Mar 2019 - Jon Harrison
EM correction – Watch out for 5 triggers

EM equities are set for a correction. Chinese and EM stocks are over-extended vs. their respective long run valuations. 5 main risks are under-priced:

  • No respite from global slowdown. The Fed’s action on QT shows they are concerned about growth. We forecast a rate cut in Q3 but US data will deteriorate in the short-term. Eurozone is in no position to help.
  • China’s stimulus will help but it’s effects won’t come through until H2. Until then the data will continue to fall hard.
  • Trade leading indicator economies (e.g. S Korea and Taiwan) show that Chinese trade will continue to fall for the next 2 months. PPI will turn negative in H1.
  • US-China trade deal will disappoint markets. Tariff removal is priced in to some extent. We expect that tariffs will remain in place.
  • Domestic risks in EMs may blow up. For example Brazilian political crisis, Indian elections, Indonesian elections and Turkish fiscal and currency crisis.

This leaves EM assets, and equities in particular, exposed to rapid repricing.

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#China #Emerging Markets #Equities #Eurozone #Jon Harrison #QT #Stocks #Tariff #Trade
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