EC HH EM Vs DM Macro And Markets -

EC HH EM Vs DM Macro And Markets

Jan 05, 2018Jeremy ParkinsonFinance0

With the December round of PMI data just released, it’s a good time to take a look at some of the key macro and market metrics for developed vs emerging economies. Aside from the timeliness aspect, there are some very interesting trends underway across both EM and DM, and particularly on the relativities.

Before getting into it, I know some of you will be thinking “hey, EM is a worn out term, it’s too heterogeneous and wrong to lump them all together” – and while I get this viewpoint, I’ve previously highlighted a couple of metrics that delineate EM from DM and the distinction still seems fair on this analysis.

Back to the topic, the key takeaways (as outlined in the charts below), are:

-The EM composite PMI is picking up the pace (broke out to a 6 and a half year high), yet there is still considerable upside should a catch-up process get underway.

-The EM economic surprise index has reset back to neutral, while DM is at multi-year highs… the implication being that there is more scope for upside in EM vs DM.

-EM aggregate monetary policy rates have been on a gradual easing path vs tightening in developed economies; at the margin, this is more favorable for EM on a cyclical view.

-EM equity relative performance appears to have put in a long-cycle low, and we could be on the cusp of a potential multi-year cycle of EM outperformance. The tactical view (cycle + policy) aligns with this.

1. Manufacturing Surveys: A very interesting dynamic is underway in both EM and DM, with the final quarter of 2017 seeing significant acceleration on both fronts, but note the scope for catch-up (and upside) in EM is arguably much greater. Also worth noting is the breakout in the EM composite to the highest point since mid-2011… did somebody say melt-up?

2. Economic Surprise: Interestingly enough, while the EM composite PMI has been improving lately, the data in general for emerging markets has been basically coming in right on expectations if not disappointing somewhat (China was key in this initially, and subsequently LatAm). This turn down in the EM ESI contrasts with major positive surprises in developed economies (G10).