EM has bounced off its lows, largely driven by perceived Fed dovishness and less bearish views on China. But we do not see the recent rally as the beginning of a sustainable upswing in EM, as a Fed reprieve is likely to be temporary and China data are still not improving meaningfully. In this piece, we reassess how EM is progressing in its rebalancing cycle and find there is still more adjustment to go. Relative to consensus growth views and current interest rates, MSCI EM trades just 3% below its current ‘fair value’ of 882, and we suggest investors look to relative value within EM.
“The third wave” requires further adjustment before the turn
(1) EM equity has modest upside but US bad = EM good is limited
(2) EM cycle – Where are we in terms of imbalances and growth?
(3) Crisis or rebalancing – is credit a concern?
(4) EM trades: “DM vs. EM” themes are our highest conviction view; we like Asia vs. EM; India/Taiwan/Korea/Mexico vs. EM and long-only in India.