By Ian Beattie, Sub-Investment Manager of the Nedgroup Investments Global Emerging Markets Equity Fund
Global monetary indicators have weakened further over the last three months and are signalling a slowdown in economic momentum during H1 2022 along with a loss of “excess” money support for markets. Emerging market equities could show relative resilience despite this backdrop as Chinese stocks recover in response to monetary improvement and an easing of regulatory concerns.
Global six-month real narrow money growth fell significantly during 2021 and typically leads the global manufacturing PMI new orders index by 6-7 months, suggesting that the latter will weaken into mid-2022 at least.
An easing of supply constraints in late 2021, meanwhile, contributed to a pick-up in global six-month industrial output, resulting in the real money / output growth gap turning negative – historically a warning signal for equity markets.
The suggested scenario of a prospective economic slowdown with tighter liquidity would normally be unfavourable for EM equities. However, China-specific factors resulted in EM underperforming in 2021 despite a supportive global economic / liquidity backdrop and the reverse could be the case this year.
We argued a year ago that Chinese monetary policy was overly restrictive, and the consensus was wrong to expect solid 2021 growth and PBoC tightening. The opposite scenario may now be developing, with the consensus bearish because of the property crisis but money trends tentatively suggesting economic stabilisation / improvement.
Chinese monetary policy, however, operates largely “under the radar” via directions to the banking system to expand or contract loan supply. A rise in the loan approvals index in the PBoC’s quarterly bankers’ survey suggests that the credit tap has been reopened.
The stabilisation of Chinese real money growth in contrast to a further fall in the G7 has resulted the G7 / E7 gap almost closing, consistent with better EM relative performance By contrast, high inflation and monetary policy tightening have been reflected in real money contraction in Brazil and Russia – Brazil is already in recession and Russia could follow in 2022, suggesting that policy U-turns will be necessary in both cases, with associated
downside currency risk.
Elsewhere, real money growth was weak in Mexico, South Africa and Poland but has recovered recently. The real money growth pick-up in India has widened the gap with China, suggesting delaying switching exposure between the two markets despite India’s huge outperformance in 2022.