Analysts see no reason to panic about emerging markets

Emerging market (EM) stocks have fallen by almost a quarter over the past year amidst the general malaise prompted by China’s problems, which have reduced demand for their goods, and the slump in the prices of the commodities many of them produce. Emerging market currencies have weakened too.

However, analysts see no reason to panic.

“EM credit growth remains weak by its usual standards but there is no evidence (yet) of a widespread ‘credit crunch’ that could be the precursor to a more serious downturn in economic activity,” writes Neil Shearing, chief emerging markets economist at Capital Economics.

“Of the many reasons that have been cited over the past few weeks to be bearish on EMs, the one that we have most sympathy with is the notion that the rapid build-up of private-sector debt over the past decade could create financial-sector vulnerabilities that in turn could spur problems in the real economy,” he adds.

“Yet while we are concerned about the risks posed by a rapid build-up of debt in a handful of emerging markets, there is nothing in the latest data to support claims we’ve seen in recent days that EMs are already in the midst of a credit crunch that will prove the precursor to sharp falls in economic activity,” Shearing continues.

Emerging market stocks have fallen sharply in recent months

Source: Investing.com

Alberto Aides, an economist at Bank of America Merrill Lynch, is even mildly optimistic – albeit with many caveats. “We expect EM to recover modestly in 2016 if US and Chinese growth hold up, and commodity prices recover,” he writes.

There are two big “ifs” in that sentence, as Aides acknowledges. “The recent increase in financial volatility, mainly due to China growth concerns, lower oil prices and uncertainty about US growth, adds risks to our call. Greater financial globalisation, and a weaker fiscal stance and balance sheet limit the room for countercyclical monetary and fiscal policy in EM,” he writes.

Still, he reckons the Mexican peso is undervalued, noting that it is less exposed to commodities than other Latin American currencies. And with a more short-term focus, he notes that a BAML forecasting model is signalling long positions in the Chinese, Indian, South Korean, Philippine and Peruvian currencies.

Elsewhere, Shearing notes that credit continues to contract in a handful of EMs in Europe, including Hungary, Bulgaria and Croatia.

“However, as things stand, these EMs are the exception rather than the rule,” he writes. “This doesn’t mean that emerging markets won’t experience a credit crunch in the future – and we will continue to monitor those we have previously identified as ‘at risk’ carefully over the coming months. But the most recent data seem to point to a soft landing for credit growth in the emerging world, not an abrupt crunch,” he writes.

This post was taken from news.markets: https://news.markets/shares/analysts-see-no-reason-to-panic-about-emerging-markets-8593/