Real money flows into EM stocks and bonds have surged recently, perhaps in anticipation of a benign outcome to China-US trade talks. Our daily tracking estimates flows into non-China EM at $23 bn in Q2. Our measure of China’s “core” current account surplus remains healthy, but additional US tariffs could tip the balance and cause RMB to fall.

Addition to the MSCI EM Index would acknowledge capital markets reform and send a positive signal to investors. We expect foreign inflows of $1.8 billion from passive investors and up to $7 billion from active investors in 2020-2022.

Bearish sentiment stems from policy concerns. Key risks are Pemex’s fragility and US tensions. Weakening growth will make fiscal targets challenging to meet and add pressure on the central bank to ease monetary policy. Market discipline and a robust macro framework should help limit policy slippage. 

Our assessment of EM current accounts is benign, with large deficits just in South Africa and Colombia. However, still high debt amortization calls for caution. This is especially the case in Turkey and South Africa.
Resident outflows are a risk in Turkey and Argentina, despite much lower deficits due to import compression.

Neglect of structural distortions has prevented Morocco from matching its more successful EM peers in raising its standard of living. 

High import content in export production and investment is evident across the region. Recent import compression should support current account positions amid weak exports. However, the multiplier effects of import plunge on investment will likely depress GDP growth.

Disconnect between Fed dots and market rate expectations set to persist; Negative-yielding debt hits a record high of over $12 trillion—putting the risk of asset price bubbles in focus; Further USD strength could pose significant challenges for non-bank borrowers in emerging markets and mature markets outside the U.S.; More monetary stimulus would widen the gap between the cost of equity and debt, triggering another sharp accumulation in corporate debt; Robust growth in Panda bond issuance 

Supported by MSCI upgrade Saudi Arabia has attracted $10.8bn in foreign equity inflows so far this year. In contrast, renewed trade tensions sparked a sharp decline in portfolio equity flows to other EMs. Saudi Arabia can count on an additional $40bn in equity inflows in the coming years. 
 

Our global growth tracker has fallen to its lowest levels since 2015, driven by a sharp drop in manufacturing sentiment around the world. The evidence points to normal ups and downs in global manufacturing, with some early signs that hard-hit places like Germany are turning up.

Consumption-driven growth has led to increasing imbalances and inflation. Ad-hoc policy changes weigh on sentiment, undermining new investment. Further stimulus would pose risks to macroeconomic stability and outlook. 

Argentina’s public debt will decline markedly, if fiscal consolidation is large and long-lasting. Fiscal easing could critically affect debt levels, and complicate refinancing of maturing debt. Debt vulnerability will remain high for years.

EM Growth Tracker at 3.8% 3m/3m SAAR in May. Business and financial conditions drag growth down. Imports appear to have bottomed out, improving trade.

The June 2019 IIF Global Regulatory Update provides updates on Advocacy on Addressing Market Fragmentation, Evaluation of Too-Big-To-Fail (TBTF) Reforms and the Basel III Finalization & Cumulative Capital Impact Study.

Analysts begin to price in trade war impact on corporate earnings—but estimates are still pretty upbeat; Emerging markets: how long will the boost from lower global rates last?; Risk-return tradeoff on carry trades looking more attractive; Convergence in the air for Euro Area bond spreads; LIBOR transition—some progress on moving towards new reference rates, but asset managers lag

Euro periphery current account balances have almost all swung into surplus, which is often cited as positive evidence that competitiveness has been restored. But the swing to current account surplus has a big cyclical component due to still large output gaps in some cases. Adjusted for slack, Euro periphery current accounts are mostly still in deficit.

We have estimated Ukraine’s financing gap at $2 bn (1.5% of GDP). A key ingredient is a stable current account despite growth recovery. This is due to a favorable shift in the current account toward the EU. Domestic politics aside, a key risk is the growth slowdown in Europe.

Venezuela’s oil sector has been in decline for decades. As in Iran, US sanctions are having a severe impact, making the oil output collapse almost unprecedented. Even though sanctions did not deter Asian buyers, the oil sector’s outlook is dim unless policies change.