Develop State-Emerging Market Growth Divergence Widening
One month into the second half of the year, our view of developed state over emerging market macroeconomic performance is playing out. While on the whole we expect stronger real GDP growth globally in H2 2013 than in the first half of the year, the divergence in growth between developed and emerging markets has been one of the big themes of 2013, and the gap is increasing.
Activity in the biggest economies in Asia and Latin America is decelerating or contracting, while the eurozone appears to have bottomed out and the US and UK are showing signs of resurgence. What is significant about the most recent poor economic readings is how broad-based they have been across emerging markets, despite ostensibly different idiosyncratic challenges facing each individual country. Our overall view is that for emerging markets, the past decade of near-perfect conditions is over, and the next few years will prove much more challenging. This has implications not just for global macroeconomic trends, but for our major asset class strategies, which include developed over emerging market equities, continued downside pressure on EM currencies and higher interest rates in the developed world.
The latest issue of EMM also includes, among many others, the following key stories:
Latin America: Our latest Sovereign Risk Ratings update reveals that Latin America’s credit profile has slipped, reflecting a deteriorating macroeconomic picture. Selectivity will be key, as fundamentally stronger countries are set to outperform.
Central & Eastern Europe: Strong purchasing managers’ index (PMI) readings from Central Europe, combined with improved German factory orders, confirm our long-held expectations of an export-drive recovery in H2 2013.
Middle East: The unexpected decision by Egypt’s Monetary Policy Committee to lower interest rates by 50 basis points is indicative of the interim government’s expansionist monetary policies.
Sub-Saharan Africa: Yields on SSA eurobonds will trend higher over the coming months. Weak fiscal positions in Ghana and Senegal leave these countries’ bonds especially exposed.
This Week’s Trivia Question
Last week, in light of the fact that a cleric was about to be sworn in as Iran’s new president, we asked, when was the last time that a cleric served as head of state of a European country (excluding the Vatican?). Who was that individual? The answer is Archbishop Makarios III, who was President of Cyprus in 1960-1974, and from 1974 to 1977.
This week’s question is as follows: Which autonomous region announced earlier this week that it was suspending all relations with its federal government, accusing it of failing to uphold constitutional principles and undermining reconciliation efforts? Hint: The territory has oil deposits and is mentioned in the Bible.