EM markets off to a flyer, despite softer economic data

EM financial markets have made a flying start to 2018, with most equity markets up by 4-6% since the start of the year and most currencies up by 2-3% against the US dollar. However, the incoming economic data have, if anything, been slightly softer than expected in recent months. Our GDP Tracker suggests that aggregate EM growth probably slowed to around 4.5% y/y in Q4, down from 4.7% y/y in Q3. Our China Activity Proxy suggests that growth there slowed in the final quarter of last year (despite the official figures painting a picture of continued stability), while the latest industrial production data from elsewhere in Asia have been disappointing. Russia’s recovery lost some momentum at the end of last year too. Looking ahead, while we expect economic growth to strengthen in some parts of the emerging world (notably Latin America), we think it will slow in others (including China, Turkey and most of Emerging Asia). The net result is that, in contrast to the upbeat consensus, we expect aggregate EM growth to slow this year. This may ultimately take some of the steam out of the rally in EM financial markets.