NN IP Indicator shows strong improvement in financial conditions in emerging markets

Higher capital inflows, appreciating currencies and more room for policy makers to ease monetary policy has spurred a strong improvement in financial conditions in emerging markets (EMs) since February, data from NN Investment Partners shows.

NN IP’s EM Financial Conditions Indicator has risen from 0.08 in February to 0.56 in March. The Indicator gives an average three-month score of the 21 main EMs and takes into account the change in policy rates, swap rates, bond yields, fiscal accounts, fiscal policy expectations, nominal effective exchange rates and capital flows. It has a range of -3.00 to +3.00.

Maarten-Jan Bakkum, Senior Emerging Markets Strategist, NN Investment Partners, says the sharp rise in the Indicator, combined with the strong export performance, increases the chance that domestic demand growth will also start improving in the coming quarters.

Maarten-Jan Bakkum commented: “We continue to believe that the room for a widespread domestic demand recovery is limited because most emerging economies are in a steady deleveraging trend after a long period of excessive credit growth. But easier financial conditions must have some positive impact on consumption and investment growth.”

NN IP notes that increasing doubts about President Trump’s effectiveness in recent weeks have had a negative impact on US equities and tempered investors’ optimism about US reflation, which could lead to lower growth expectations for the US economy and diminish the high hopes for global trade growth and an export-led recovery in EMs.

Maarten-Jan Bakkum added:“While we acknowledge that doubts about US reflation could potentially affect EM growth expectations, particularly because EM domestic demand growth is still weak, we also think that a stumbling Trump makes far-reaching protectionist measures more unlikely. Without the protectionist fears in the market, EM probably would have performed much better than it already has done in the past months. So with every failure of the US president to get his proposals accepted and implemented, investors are likely to get less worried about import taxes and other obstacles for EM exporters to sell their goods in the US.”