Posts here in late 2015 and early 2016 argued for a positive stance on emerging economies and equity markets because 1) narrow money trends in the “E7” large economies had strengthened, signalling a recovery in growth during the first half of 2016, and 2) US money trends, by contrast, had weakened, suggesting reduced upward pressure on US interest rates and the dollar – this was expected to bring relief to China and other countries suffering capital outflows.
E7 economic growth has, indeed, rebounded since end-2015, with money trends suggesting a further pick-up. US / G7 money developments are also now positive. US rates, however, may soon be under renewed upward pressure from firmer economic data and a continued rise in wage growth. This suggests remaining positive on emerging markets but tilting equity market exposure towards “cyclical” markets that benefit disproportionately from stronger global growth while reducing weightings in “interest-rate-sensitive” markets that have correlated positively with US / domestic bond prices historically.
Six-month growth of E7 real (i.e. consumer price-deflated) narrow money began to surge in mid-2015, suggesting stronger economic momentum in spring 2016, allowing for an average nine-month lead. Non-monetary leading indicators confirmed this signal in early 2016. Six-month growth of E7 industrial output rose sharply in May, maintaining a stronger level in June. Real money growth, meanwhile, has risen further, reaching its highest level since 2010 – see first chart.
Simon Ward, Chief Economist, Henderson Global Investors
