Global Growth – A Thaw?
January 26, 2023
Read Time 2 MIN
Global Growth
The China rebound story is a key driver for this year’s financial markets – including emerging markets (EM) - but we have to wait for a few more days until the next set of China’s activity gauges (which are expected to improve noticeably, reaffirming higher 2023 growth forecasts – fingers crossed!). In the meantime, the advanced Q4 GDP print for another global growth driver - the U.S. - gave some food for thought. The headline number was stronger than expected but details were soft, including a significant inventory buildup. This is happening against the backdrop of a steadily increasing probability of a recession in the U.S. 12 months from now – currently at 47% (according to the New York Federal Reserve’s model), which is high by historic standards (see chart below). The narrative of diverging recession probabilities/growth momenta in Europe and the U.S. probably got new admirers today. This might not be the best signal for the U.S. Dollar, but EM local debt might appreciate it a bit more.
China Rebound and EM
Asian EMs are expected to be among the key beneficiaries of China’s rebound – both via trade and tourism channels. This is great news for regional economies were the growth momentum is currently stalling and the current account deteriorated in 2022 – like South Korea. This is even better news for countries like Thailand, where the growth momentum is strengthening and the current account shows signs of improvement. This explains why Thailand is among three best-performing constituents of J.P. Morgan’s EM local debt index (GBI-EM) so far this year. However, getting extra “fuel” from China’s recovery can translate into higher price pressures, which is why Thailand’s central bank maintained a hawkish rhetoric (in addition to a hike) at its last rate-setting meeting.
EM Growth Cliff
The growth outlook in the rest of EM is still wobbly. The South African central bank just cut the 2023 forecast to mere 0.3% from 1.1%, and used this to justify a slower pace of rate hikes (+25bps earlier today). Central Europe might be joined at the hip with the Eurozone economically and financially, but the consensus forecasts are yet to reflect the Eurozone’s activity “thaw” and the positive impact of lower energy prices. LATAM is also in a tough spot – the prolonged policy uncertainty in Brazil or political noise in Peru can lead to further growth downgrades, putting investors off despite high carry. Stay tuned!
Chart at a Glance: U.S. Recession Probability Still Uncomfortably High*
Source: Bloomberg LP.
* NYFYPROB Index – The New York Fed Recession Probability Index.
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PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan's index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG - JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.
The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Certain information may be provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as the date of this communication and are subject to change. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.
Investing in international markets carries risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.
PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan's index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG - JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.
The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Certain information may be provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as the date of this communication and are subject to change. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.
Investing in international markets carries risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.