I attended a quite interesting presentation yesterday organized by Schroder on emerging markets. Two fund managers presented on equities and debt. The head of EM debt absolute return strategies had a very interesting analysis of the current environment.
One of the most catchy slides during his presentation was the one about global liquidity which is decelerating at the global level.
According to Abdallah Guezour, the tightening of global liquidity is bearish for both the USD and hard currency EM debt.
Per Schroder’s presentation: “Our measure of global financial liquidity has already experienced a sharp deceleration this year, which we tend to consider as an early warning indicator that a setback in global financial markets is in the offing.”
He advised to « maintain minimal exposure » to the asset class, underlying its high valuation, the fact that it’s overbought and that it’s very sensitive to the US interest rate cycle.
His view was more positive on local EM debt, but with a very selective view on countries that have better fundamentals and have structural reforms in place (Argentina, Brazil, Mexico, Russia, South Africa, Indonesia, India).
He also had a bullish view on EM FX, especially in countries where the balance of payment sustainability has been restored (BRL, MXN, RUB, ZAR, INR and MYR).
His views on the US cycle were also quite bearish. In the following chart, Guezour said the US economy was in the 2 phase (Blind Run) with increasing twin deficits, inflationary pressure and increasing leverage.
This will probably lead to a recession in the US, a risk that is worthy monitoring in the coming quarters.