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29 Dec 2015
Revisiting the EM’s wall of money – HSBC
FXStreet (Delhi) – Research Team at HSBC, suggests that the emerging markets have disappointed ever since the mid-2013 ‘taper tantrum’ when they shed the status they had gained in the aftermath of the global financial crisis as saviours of the world economy.
Key Quotes
“If the China story turns around, global trade, Asian economies and commodity producers would all see the benefits. The knock-on effects could also shore up the Russian and the Brazilian economies, both suffering severe recessions.
Current account deficits in many troubled EM economies have already been silently correcting, inflation is not a problem – generally speaking – and some countries have been undertaking structural reforms. Yes, they are still clearly insufficient, but countries like India, Indonesia, Malaysia, Egypt, UAE, even Brazil have taken steps to fix distortive subsidies, adjust tariffs, and introduce more market-driven pricing to help the public finances. India and Mexico have led the way, with reforms in the food, energy, telecom sectors, FDI, etc. We think it is only a matter of time before these changes show some positive results.
We currently project the EM-DM growth differential at slightly more than 2.0% in 2016, broadly stable at around 2015 levels and hence consistent with capital inflows of around USD500bn. But if the growth differential widens to 3.0pp, all else being equal, then capital flows would almost double to nearly USD900bn. This would be a sharp spike in capital flows after a dismal 2015. Based on our model flows would be predominantly in portfolio flows, equities and fixed income.”
Key Quotes
“If the China story turns around, global trade, Asian economies and commodity producers would all see the benefits. The knock-on effects could also shore up the Russian and the Brazilian economies, both suffering severe recessions.
Current account deficits in many troubled EM economies have already been silently correcting, inflation is not a problem – generally speaking – and some countries have been undertaking structural reforms. Yes, they are still clearly insufficient, but countries like India, Indonesia, Malaysia, Egypt, UAE, even Brazil have taken steps to fix distortive subsidies, adjust tariffs, and introduce more market-driven pricing to help the public finances. India and Mexico have led the way, with reforms in the food, energy, telecom sectors, FDI, etc. We think it is only a matter of time before these changes show some positive results.
We currently project the EM-DM growth differential at slightly more than 2.0% in 2016, broadly stable at around 2015 levels and hence consistent with capital inflows of around USD500bn. But if the growth differential widens to 3.0pp, all else being equal, then capital flows would almost double to nearly USD900bn. This would be a sharp spike in capital flows after a dismal 2015. Based on our model flows would be predominantly in portfolio flows, equities and fixed income.”