EM's: rethinking the Fed tightening expectations - BBH

Analysts at Brown Brothers Harriman explained that the soft US data and delays to fiscal stimulus plans from the Trump administration has led to a rethink of Fed tightening expectations.  

Key Quotes:

"While a June hike is still largely priced in, markets no longer view another hike in H2 as likely. Indeed, only one hike is currently priced in for 2018 followed by only one in 2019. The benign global backdrop has helped propel the S&P 500 to new record highs this week.

It’s worth noting that the correlation between EM and DM stocks is currently nearing the year’s high around 0.50. This is still down from a high of 0.85 posted last summer, but rising correlations suggest that the EM equity outlook has become more dependent of DM than it was in the recent past.  

One big negative factor for EM equities this past quarter has been lower commodity prices.  Here, the outlook remains very volatile as markets struggle with the possibility of persistent excess global supply in several industrial commodities. WTI oil is down 15% from the April 12 peak, while iron ore is down 35% from the April 5 high.  

MSCI EM made a new cycle high last week, and is currently up 18% YTD. It is trading at levels last seen in May 2015, and is on track to test the May 2015 high near 1069.  After that is the September 2014 high near 1104.

As the global backdrop hopefully clears up in the coming months, we still believe it is very important for investors to continue focusing on country fundamentals and on hedging out currency risk whenever feasible.  Regionally, Asia is the best equity performer so far in 2017 (up 22.6% YTD), followed by Latin America (up 7.4%) and then EMEA (up 5.3%).  

Our 1-rated grouping (outperformers) for Q2 2017 consists of Singapore, Korea, Hong Kong, Israel, and China.  Both Hong Kong and Israel improved from 2 to 1, while Czech Republic and Poland both worsened from 1 to 2.  Other changes of note were Malaysia and Indonesia both improving from 4 to 3, while both Egypt and Turkey improved from 5 to 3.  We note that of the top 10 countries, 6 are in Asia and 4 are in EMEA.  

Our 5-rated grouping (underperformers) for Q2 2017 consists of India, Colombia, Mexico, Brazil, and South Africa. India fell from 3 to 5, while Colombia and Mexico both worsened from 4 to 5.  Russia improved from 5 to 4.  Other changes of note were Qatar, Thailand, and Chile all worsening from 3 to 4.  We note that of the bottom 10 countries, 5 are in Latin America and 3 are in EMEA.  The other 2 are in Asia.

Our next model update for Q3 2017 will come out at the beginning of July."