Are emerging markets returning to form?

June 11, 2019


 

Emerging markets (EMs) are interesting. In 2018, trade wars threatened to disrupt supply chains throughout Asia, while the prospect of rising U.S. interest rates and a stronger dollar prompted some capital flight from the region.

These pressures have diminished in recent months, however, and there are some early indications of cyclical recovery, such as strengthening activity indicators, lower exchange rate volatility and higher risk appetite, as well as corrections in external imbalances of laggard countries of 2018. Emerging market equities and debt have responded favorably.

The key question is whether all the good news is priced in: in our central scenario, we expect EMs to hold up well as a group, and idiosyncratic risk in some of the problematic countries seems to have diminished. Overall, thanks to easier global financial conditions translating into looser policies in EMs, stabilizing Chinese growth in H2 2019, and an overall stable USD, we believe 2019 could be a good year for EMs as a whole. A pickup in global growth and trade could be significant ammunition for an even better year for EMs, in our opinion.

Shamik Dhar, Chief Economist, BNY Mellon Investment Management

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Charts are provided for illustrative purposes and are not indicative of the past or future performance of any BNY Mellon Investment Management product.

Definitions:
Manufacturing PMIs: The purchasing managers' index (PMI) is an economic indicator that surveys purchasing managers at businesses that make up a given sector. The most common PMI surveys are the manufacturing PMI and the services PMI.

Domestic Value Added: Domestic value added in exports is an estimation of value added, by an economy, in producing goods and services for export.

Supply Chain: In the context of exports, the supply chain means that an economy may be contributing to the manufacturing of certain goods or services but does not manufacture the entire product.

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