The Greek crisis dominated news flow over the month, culminating in the country defaulting on its IMF payment. The situation remains fluid and highly uncertain, however, aside from some short-term volatility, the Investec AM team feels that the wider market impact for emerging market investors is negligible. There have been, in their view, much more pertinent developments for the asset class elsewhere during the month. First, there has been a palpable pick-up in US economic activity after the ‘soft patch’ earlier in the year, which has implications for US interest rates. Second, China’s fiscal and monetary policy appears to be becoming more stimulative, in an attempt to reduce the risks associated with a more severe economic slowdown, says the team in the Emerging Market Debt Outlook.
“Our base case remains that the US Federal Reserve (Fed) will start its rate hiking cycle in September.” It states. However, the firm remains of the opinion that we will see a very gradual tighteningcycle from the Fed thereafter, and even that first hike will likely be accompanied by very dovish wording. Market volatility over June saw investor inflows to EMs weaken to its slowest pace of the year, although EM debt flows remain positive (source: IIF). Volatility may persist until we see greater clarity on the path of Fed rate hikes, but they continue to believe that we will not see drastic outflows from the asset class.
Investec AM remains cautious in its global outlook for growth.The firm is encouraged by stronger data from developed markets, but data flow from emerging markets, in their view, remains disappointing. The asset management firm expects Chinese growth to moderate further. While recent easing measures should prevent a sharp deterioration, they see too little underlying domestic demand for an uptick in growth in the short-term.
“We believe that inflation remains well-contained across most EMs, and the moderate growth outlook in China means we don’t foresee upward surprises from commodity prices, while worries over any upside risks from El Nino weather effects are subsiding” the report says. “We believe that the asset class, despite short-term headwinds, should perform better over the next few years” it concludes.