Lionel Melin

Lionel Melin

Senior Cross-Asset strategist


Is the EM Rally Worth Chasing ?

27 May 2016

Active Strategies

Positive stories are found in a handful of large Emerging Market countries, while activity should broadly find its trough in 2016.

  • Consolidating Chinese macroeconomics could be a positive, but they seem anchored on a structural slowing-down trend. Idiosyncratic (Brazil, India, Russia, etc.) stories are a difficult play as we refrain from taking wagers on political (upside or downside) risks.
  • Valuations look attractive relative to DM, but in-line with their history.

 

The three core drivers of EM performance we have identified – Dovish Fed, higher commodity prices, and DM markets’ performance – threaten to lose steam.

  • The global environment (Fed accommodative discourse, post-selloff bounce back in oil prices and Developed Markets (DM)) has lifted EM equities recently.
  • We think that these supports have almost fully played out. We foresee oil prices to consolidate in the $40-45 p/b region and DM equity to trade range-bound on aggregate (difficult reflation in Japan and EMU while the US looks fully valued).
  • Last but not least, we believe markets are complacent towards the Fed when pricing no rate hike throughout 2016 with a 50% probability.

 

Altogether, we think that EM stocks could enjoy the breathing room that a dovish Fed is granting them while China scares stay at bay. However, we cannot identify extra positive catalysts at the moment and recommend an allocation in line with portfolio benchmarks.

 


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