Conclusion: Growth Slowing continues to be the predominant theme across both regions and the monetary policy outlook is generally less supportive than it was 3-6 months ago. Combined with our forward-looking G/I/P analysis, this backdrop makes consensus valuation/"buying opportunity" calls risky from a TREND-duration perspective.
On red days like today, naturally higher-beta names lead to the downside from a single stock perspective; the same can generally be said from a country risk perspective as well, given the relatively high volatility of the various emerging market equity indices, currencies, and bond markets. Rather than overreact to these proactively-predicted drawdowns, we find it helpful from a research perspective to head back to the trenches of fundamental analysis in order to refresh our general thoughts on each region.
Looking at the trailing data points out of both Asia and Latin America, it’s clear that rates of economic growth continues to make lower-highs across both regions. The ~2yr trend of slowing Real GDP growth continued unabated in 4Q11, with Asia (+6.8% YoY) and Latin America (+3.2% YoY) both posting headline numbers that were the lowest since 2H09 for each region, respectively.
For a more up-to-date measure of regional demand, we turn to each region’s GDP-weighted Imports, with the premise that the growth rate of the quantity of goods imported represents a broad read-through into the demand trends of a particular country or region – irrespective of their ultimate destinations (consumption, fixed asset investment, manufacturing and re-export, etc.). As the chart below shows (though MAR ’12) demand in Asia and Latin America continues to slow:
Looking at each region’s trailing inflation trends, a bifurcation has emerged in timing, with Asian CPI peaking from a cyclical perspective in 3Q11 and Latin American CPI having done the same in 4Q11. In Asia, inflation (+3.6% YoY) hasn’t been this slow since 4Q09; in Latin America since 3Q10 (+6.6% YoY):
The trend of slowing inflation across both regions has been supported by relative currency strength vs. global food and energy prices, which have become increasingly driven by U.S. monetary policy. Still, despite what the Chinese, Brazilians and South Koreans have identified as a Fed/ECB-induced “flood of destabilizing liquidity”, their currencies have recently experienced less downside on the margin relative to the USD than key commodity prices over the LTM – thus providing a disinflationary tailwind to each region’s CPI indices:
Monetary policy, which is far less easy and insightful to aggregate, is fairly bifurcated across both region – a noteworthy delta from late in 2011, when the country-to-country outlooks collectively sang the tune of easier policy across the board. While forward-looking currency markets generally continue to suggest easier policy ahead across both regions, forward-looking interest rate markets are pricing in a wide range of outcomes over the NTM – largely due to expectations of easier policy (on the margin) being pared back over the last 3-6 months:
When analyzed on a holistic basis country-to-country, both the direction and magnitude of anticipated monetary policy throughout various counties in Asia and Latin America leads to some clear divergences, as outlined in the chart below:
Looking ahead, our predictive tracking algorithms suggest Asian Real GDP growth bottoms here in 2Q, while that of Latin America slows at a demonstrably slower rate in the quarter. Jumping the 3Q, our models are currently pointing to a modest inflection point in the slopes of both region’s rates of economic growth. The 3-6 month inflation outlook for both regions is fairly muted from both a directional and magnitude perspective. We are comfortable with this fundamental outlook provided we see a continued Deflating of the Inflation across key commodity markets. As always, we will continue to vet all the relevant information (market prices, economic data, policy maneuvers, etc.) on a daily basis to either confirm or dispel this baseline scenario, flagging to you in real-time any meaningful divergences.