In The Shadow Of Fear

- Overview: In the shadow of fear "The immediate economic and financial context remains market supportive. However, we expect market fears to cast a shadow on EM assets: investors are, justifiably in our view, increasingly focused on the riskier medium-term outlook, hence we are gradually fading our emphasis on the cyclical recovery as a market driver. Nevertheless, we continue to expect EM outperformance as emerging market countries are less vulnerable to the fiscal challenges facing industrial economies."
- Asia: Policy normalisation to continue "GDP growth is expected to slow to 7.6% in 2011 from 8.8% this year, as global PMIs peak, the inventory cycle draws to a close and fiscal stimulus dissipates. Excess capacity is largely absorbed, core CPI is close to trend and, outside China, credit growth is accelerating. Monetary conditions are likely to continue to normalise, driven by modest currency appreciation, cautious rate hikes and further quantitative measures."
- EMEA: Sustaining recovery in times of euro angst "In light of a weaker euro, fiscal consolidation in the euro area, and delayed rate hikes in core markets, we see EM EMEA also focusing on fiscal consolidation while leaving monetary policy looser for longer. Inflation trends support this; the growth outlook is unchanged."
- Latin America: Cruising "Amid a volatile world economy, Latin America’s economy has been remarkably uneventful. Growth has been fast and driven (almost everywhere) by domestic demand. While solvency conditions remain strong, fiscal policy is somewhat procyclical."
- Asia: Recovery on track; beware of tail risks "We enter the second half of the year still positive on EM assets and look to be cautiously positioned for a recovery. Headline risks continue to present tail-risk events, such as Europe, and regulatory changes. China’s currency reform may spark a rebound in risk-taking in Asia."
- EMEA: Sailing close to the wind "Price correction and de-positioning have improved the EMEA market technical outlook. However, the proximity to the key market risk – Europe – continues to produce crosswinds for EMEA assets and tail risk trades warrant greater attention than usual."
- Latin America: Reassessing risks "We remain comfortable with risky assets in Latin America, particularly in credit and FX, but we are keeping an eye on hedging strategies and relative value. In low beta credit space, Colombia remains our favourite pick, and we prefer Argentina over Venezuela.
- EM Corporate Credit: New issuance takes a vacation, but solid fundamentals remain "We view the recent pullback as an opportunity to add corporate exposure, given the strong fundamental backdrop, but expect credit differentiation to gain importance when technicals ease. Corporate liquidity, earnings and commodity prices are likely drivers."
Barclays Emerging Markets Quaterly June2010