Better financial conditions in emerging markets and problems at home for Donald Trump could spur even more improvement in emerging economies, NN Investment Partners (NNIP) said.
Emerging markets have seen higher capital inflows, appreciating currencies and more room for policy makers to ease monetary policy, and these have spurred a strong improvement in financial conditions, according to the asset manager.
Meanwhile, “increasing doubts about President Trump’s effectiveness” could make him less likely to implement protectionist measures that would hurt emerging economies.
The firm’s more positive outlook for emerging markets is based on improved export performance and NNIP’s ‘EM Financial Conditions Indicator’, which has risen from 0.08 in February to 0.56 in March. The indicator factors in policy rates, bond yields, fiscal accounts and other data to give a reading between -3.00 and +3.00.
NNIP expects domestic demand in emerging markets to improve, albeit in a limited way, in the coming quarters.
Maarten-Jan Bakkum, senior emerging markets strategist at the firm, said: “We continue to believe that the room for a widespread domestic demand recovery is limited because most emerging economies are in a steady deleveraging trend after a long period of excessive credit growth. But easier financial conditions must have some positive impact on consumption and investment growth.”
NNIP said doubts about Trump’s performance could hit the level of reflation the Trump wants and this should reduce the probability of him pushing on with protectionist measures.
“While we acknowledge that doubts about US reflation could potentially affect EM [emerging market] growth expectations, particularly because EM domestic demand growth is still weak, we also think that a stumbling Trump makes far-reaching protectionist measures more unlikely,” said Bakkum.
He added: “So with every failure of the US president to get his proposals accepted and implemented, investors are likely to get less worried about import taxes and other obstacles for EM exporters to sell their goods in the US.”
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