Bca - Ems CTM 2021 12 16

Shape Your ConvictionTM
Emerging
Markets
Strategy
Charts That Matter December 16, 2021
EM: A Perfect Storm

EM economies and their financial
CHART 1
markets are facing a perfect storm. In
More Downside In Chinese Non-TMT Stocks
particular:
400 CHINA INVESTABLE NON-TMT 400
• China’s slowdown is deepening, and
STOCK PRICES IN US$*
commodity prices will likely move 350 350
lower. 300 300
• Tight monetary and/or fiscal policy 250 250
settings in mainstream EM (ex-China,

200 200
Korea, and Taiwan) will be restraining
domestic demand in their economies.
150 150
• Surging US inflation has forced the
Fed to become more hawkish.
• US equity market breadth has been 100 100

Editorial Board
deteriorating, signaling a potential 2021
Arthur Budaghyan setback.
Chief Emerging 2004 2008 2012 2016 2020
Markets Strategist • Finally, the spread of the Omicron *EXCLUDES IT SECTOR BEFORE DEC 2018 AND EXCLUDES IT, MEDIA
& ENTERTAINMENT AND INTERNET & DIRECT MARKETING RETAIL AS OF
Rajeeb Pramanik variant in EM will be hard to contain DEC. 2018; REBASED TO 100 AT JANUARY 2004; SOURCE: MSCI Inc.
(SEE COPYRIGHT DECLARATION)
Senior EM Strategist
given many EM countries have
Andrija Vesic
Associate Editor
predominantly been using Chinese and
Russian vaccines to inoculate their
Juan Egaña
Research Analyst populations. These vaccines are much
Ellen JingYuan He less effective against the Omicron Absolute-return investors should maintain a
Associate Vice President variant than Western vaccines. cautious stance on EM risk assets, and asset
Roukaya Ibrahim
allocators should underweight EM equities
Vice President
A combination of all or some of the and credit versus their DM peers. We are
above will ensure that EM risk assets continuing to recommend a short position
drop further, and EM currencies will in a basket of EM currencies versus the US
depreciate versus the US dollar. dollar.
Copyright ©2021 BCA Research Inc. All Rights Reserved. Refer to last page for an important disclaimer.
Daniel Soto SURA ASSET MANAGEMENT S.A. 753323

Emerging Charts That Matter December 16, 2021 02
Markets EM: A Perfect Storm
Strategy
China’s Slowdown And Stimulus CHART 2

Are Chinese TMT Stocks Breaking Down?
While Chinese authorities have pledged to
provide more liquidity and fiscal stimulus 90
STOCK PRICES IN US$:
90
3-YEAR MOVING AVERAGE
going forward, for now it is insufficient to 80 80
boost growth. As a result, China-related
70 70
plays are breaking down:
60 60
• Chinese investable non-TMT share
prices are making new lows (Chart 1). 50
Breaking
50
below
• Copper prices have fallen through their 40 support 40
200-day moving average (Chart 13 below).
• Chinese TMT share prices appear to be 30 30
breaking below their three-year moving

25 25
average, which served as a major support CHINA MSCI INVESTABLE
GROWTH INDEX*:
in the past (Chart 2).
60 60
As the bottom panel of Chart 2 shows, TRAILLING
P/E RATIO
Chinese technology/internet/growth 55 55
companies’ trailing P/E ratio is still 35. 50 50
They are not cheap and more de-rating is 45 45

coming as we have been arguing during 40 40
past 12 months.
35 35
• The MSCI emerging Asian equity index’s 30 30

35
relative performance versus global stocks 25 25
has clearly broken down (Chart 9 below).
20 20
Such a technical breakdown heralds
15 15
further equity underperformance by 2021
emerging Asia. Granted emerging Asia 2014 2016 2018 2020

makes up 80% of the MSCI EM equity *SOURCE: MSCI Inc. (SEE COPYRIGHT DECLARATION)
index, it will be impossible for EM to

outperform DM when emerging Asia US Inflation And Bond Yields
underperforms.
US core consumer price inflation has reached
5%, more than double the Fed’s desired range.
As we discussed at length in our 2022 Key
This has led the Fed to turn more hawkish.
Views December 2 report, Chinese stimulus
will likely create a decisive upturn in its So long as the Fed is willing to hike rates
credit impulse only in the second quarter and/or the market believes the Fed will do
of 2022 (Chart 19 below). This means sufficient tightening to contain US inflation,
China plays in general, and EM equities in the US dollar will continue appreciating. For
particular, remain in a risk window for now now, we believe the greenback still has more
(Chart 17 below). upside.

Strategy
However, the long end of the US yield curve

CHART 3
remains too low. Investors and commen-
High US Inflation Uncertainty =
tators differ on their assessment of the US Wider Bond Term Premium
inflation outlook. However, one thing that % Ann%
US: Chg
we should all agree upon is that uncertainty TERM PREMIUM ON 10-YEAR PAR COUPON
over the US inflation outlook is extraordi- BOND (LS)
4.0
CONSUMERS' MEDIAN 3-YEAR EXPECTED
narily high. Heightened uncertainty requires .6
INFLATION RATE* (RS)
3.8
a higher risk premium in US Treasurys, i.e., .4
a wider bond term premium and, ultimately, 3.6
higher long-term bond yields. .2

3.4
0
Chart 3 illustrates that even though US 3.2
household inflation expectations have risen -.2
3.0
sharply – which can be a harbinger of an
-.4
inflation-wage spiral and, hence, inflation 2.8
uncertainty – the US bond term premium -.6 2.6

remains very low; in fact, it is negative.
-.8 2.4
2021
This puzzle might be resolved in two ways:
2014 2016 2018 2020
(1) either US fixed-income investors are
*SOURCE: FEDERAL RESERVE BANK OF NEW YORK
extremely complacent, and the long end of
the curve will rise materially in the months
to come; or (2) the bond market is correct
that the US neutral interest rate is very low Deteriorating Equity Breadth
because the economy cannot handle higher
rates. Global share prices have not done as well as
the S&P500 or NASDAQ indexes suggest.
However, the latter case would mean US
share prices are out of line with reality. • Global ex-US share prices in SDR1 terms
A low neutral rate means a low potential have been flat since early this year
(non-inflationary sustainable) economic (Chart 4).
growth rate and should be consistent with
• The EM equity index is down by 17%
low, not high, equity valuations. Yet, US
from its February peak.
equity valuations are very high.
• Small cap stocks in both the US and
Since January 2021, we have been arguing
the rest of the world have not produced
that US inflation will surprise to the upside
positive returns this year.
and will not be so transitory. We maintain
this view and argue that a wage inflation • Finally, the share of NASDAQ and NYSE
spiral is already in the cards (Charts 30-35 stocks trading above their 200-day
below). moving average has fallen to 25% and
1
SDR (special drawing rights) is the IMF synthetic currency,
an aggregate of major DM currencies and CNY. We use it
as a proxy for an average global currency.

Strategy
CHART 4 CHART 5
Global ex-US Share Prices Have Been Deteriorating US Equity Breadth
Flattish This Year % %
NASDAQ
260 GLOBAL EX-US 260 80 80
STOCK PRICES* IN SDR**
200-DAY MOVING AVERAGE
70 70
240 240
60 60
220 220
50 50
40 40
200 200
30 30
180 180 20 25% 20
10 10
160 160 % OF STOCKS ABOVE 200-DAY MOVING AVERAGE

% %
NYSE
2021
90 90
2018 2020 2022

80 80
*SOURCE: MSCI Inc. (SEE COPYRIGHT DECLARATION)
**SPECIAL DRAWING RIGHTS; SOURCE: IMF
70 70
60 60
40% respectively (Chart 5). This signifies 50 50

poor equity breadth in the US stock
40 40
market.
40%
30 30
Typically, breadth deterioration precedes
20 20
setbacks in the main equity indexes. This
time will likely be no different. 10
2021
10
What is the implication for EM? EM stocks 2010 2012 2014 2016 2018 2020
and currencies have been falling despite
the S&P500 making new highs. If there is
a correction in the US equity market, the
sell-off in EM risk assets and currencies will
only heighten.
Arthur Budaghyan
Chief Emerging Markets Strategist
arthurb@bcaresearch.com

Strategy
Profile Of EM Stocks Is Troublesome

Whether it is the overall EM equity index or non-TMT stocks for overall EM or Asia, they remain in a risk
window. Odds are that EM share prices will drop further before a buying opportunity emerges. We discussed
what we are looking for to turn positive on EM/China share prices in the Key Views for 2022 report.
CHART 6 CHART 7
120 EMERGING MARKETS: 120 EMERGING MARKETS:

STOCK PRICES* NON-TMT** IN US$ STOCK PRICES IN US$*:
115 115 200-DAY MOVING AVERAGE
1350 1350
110 110
105 105 1250 1250
100 100
95 95 1150 1150
90 90
1050 1050
85 85
80 80 950 950
75 75
850 850
70 70
65 65
750 750
60 60
2021 2021
2010 2012 2014 2016 2018 2020 2022 2016 2018 2020 2022
*SOURCE: MSCI Inc. (SEE COPYRIGHT DECLARATION) *SOURCE: MSCI Inc. (SEE COPYRIGHT DECLARATION)
**EXCLUDES IT SECTOR BEFORE DEC 2018 AND EXCLUDES IT, MEDIA &
ENTERTAINMENT AND INTERNET & DIRECT MARKETING RETAIL AS OF
DEC. 2018
CHART 8 CHART 9
EMERGING ASIA NON-TMT*

160 160 EMERGING ASIA vs. GLOBAL
105 RELATIVE STOCK PRICES IN US$* 105
100 100
120 120
95 95
90 90
80 80
85 85
STOCK PRICES
IN US$
80 80
60 60
75 75
70 70
2021 2021
Breakdown
40 40
2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2010 2012 2014 2016 2018 2020 2022
*REBASED TO 100 AT JANUARY 2010; *SERIES REBASED TO 100 ON JAN 2010;
EXCLUDES IT SECTOR BEFORE DEC 2018 AND EXCLUDES IT, MEDIA & SOURCE: MSCI Inc. (SEE COPYRIGHT DECLARATION)
ENTERTAINMENT AND INTERNET & DIRECT MARKETING RETAIL
AS OF DEC. 2018; SOURCE: MSCI Inc. (SEE COPYRIGHT DECLARATION)

Strategy
Market Signals
Silver and platinum prices have failed to move above their 200-day moving average and are in a free fall.
Odds are that they will now make a major cyclical low. The silver-to-gold price ratio has formed a head-
and-shoulders pattern. Such a technical profile is consistent with further downside. Finally, the cross rate
between the Swedish krona (which is exposed to the global/Chinese industrial cycle) and the Swiss franc
(a defensive currency) is in free fall and heralds lower EM share prices.
CHART 10 CHART 11
US$/ US$/
Oz SILVER PRICE IN US$ Oz
SILVER-TO-GOLD PRICE RATIO IN US$
.016 .016
2600 2600 .015 .015
2400 2400 .014 .014
2200 2200
.013 .013
2000 2000
.012 .012
1800 1800 .011 .011
1600 1600 .010 .010
.009 .009
1400 1400
.008 .008
2021
1200 1200
2017 2018 2019 2020 2021
US$/ US$/
Oz Oz CHART 12
SEK/
PLATINUM PRICE IN US$
CHF CHF vs. SEK (LS)
1200 1200 EMERGING MARKETS STOCK PRICES IN US$* (RS)
1400
1100 1100
.120
1300
1000 1000
.115 1200
900 900 Feb 2021

1100
.110
800 800
1000
.105
700 700 900
.100
800
600 600
2021 2021
.095
2017 2018 2019 2020 2021 2018 2020

*SOURCE: MSCI Inc. (SEE COPYRIGHT DECLARATION)

Strategy
Market Signals
Both copper prices and global materials share prices have broken below their 200-day moving averages.
This entails more downside in commodity prices.
Also, global ex-US small cap stocks and global ex-US equal-weighted index have been flat this year,
corroborating deteriorating breadth in global share prices.
CHART 13 CHART 14
USD c/ USD c/
Pound COPPER PRICES IN US$* Pound GLOBAL MATERIALS
380 380
200-DAY MOVING AVERAGE STOCK PRICES* IN US$
340 340
400 400
On edge
300 300
of break-
350 down 350
260 260
300 300
220 220
250 250
180 180
2021 2021
2017 2018 2019 2020 2021 2017 2018 2019 2020 2021
*SOURCE: BLOOMBERG FINANCE L.P. *SOURCE: MSCI Inc. (SEE COPYRIGHT DECLARATION)
CHART 15 CHART 16
1050 1050 NYSE STOCK INDEX:

GLOBAL EX-US SMALL CAP 500000
STOCK PRICES* IN SDR ADVANCE DECLINE LINE* (LS)
1000 1000 9.7
200-DAY MOVAVG STOCK PRICES** (RS)
950 950
The
900 900460000 Weak 9.6
rally
850 has 850 breadth
halted 9.5
800 800420000
750 750 9.4
700 700380000
9.3
650 650
340000 9.2
600 600
550 550 9.1

2021
300000 2021
2018 2019 2020 2021 2018 2020

*SOURCE: MSCI Inc. (SEE COPYRIGHT DECLARATION) *SOURCE: BLOOMBERG FINANCE L.P.
**SPECIAL DRAWING RIGHTS; SOURCE:IMF **SHOWN AS A NATURAL LOG

Strategy
China/EM Liquidity Cycles And Share Prices

Historically, China’s total social financing (TSF) impulse led EM share prices by several months. The
same holds true for EM narrow money (M1) growth.
In a nutshell, it will take some time between a decisive bottom in these liquidity indicators and a bottom
in EM stocks. The latter is not yet imminent.
CHART 17
% of
GDP
7.3
EMERGING MARKETS STOCK PRICES IN US$* (LS)
CHINA TOTAL SOCIAL FINANCING IMPULSE** (ADVANCED BY 6 MONTHS, RS) 20
7.2
7.1 15
7.0
10
6.9
6.8 5
6.7 May
0
2022
6.6
2021
-5
2010 2012 2014 2016 2018 2020

*SHOWN AS A NATURAL LOGARITHM;
SOURCE: MSCI Inc. (SEE COPYRIGHT DECLARATION)
**EXCLUDING EQUITY ISSUANCES;
CALCULATED AS 12-MONTH CHANGE ON ANNUAL CHANGE
CHART 18
Ann%
EMERGING MARKETS: Chg
7.4 STOCK PRICES* IN US$ (LS)

NARROW MONEY** (M1) GROWTH (ADVANCED BY 6 MONTHS, RS)
18
7.2
16
7.0
14
6.8
12
6.6
10
6.4
April
2022
6.2 8
6.0 6
2021
2008 2010 2012 2014 2016 2018 2020

*SOURCE: MSCI; SHOWN IN A NATUAL LOGRITHM
**SHOWN AS A 3-MONTH MOVING AVERAGE; EQUITY MARKET-CAP WEIGHTED OF 19 EMERGING ECONOMIES

Strategy
Chinese Stimulus: Mind The Time Lag

In China, an RRR cut will not immediately lead to a decisive upturn in the nation’s credit impulse.
Changes in excess reserves lead the credit impulse by six months. A durable improvement in the credit
impulse is likely only in Q2 2022.
In turn, the credit impulse leads the real economy by about nine months. In short, a material improvement
in the Chinese business cycle will likely only be in H2 2022.
CHART 19 CHART 20
% % of % of
GDP GDP CHINA:
CHINA:
EXCESS RESERVE RATIO* BCA ACTIVITY INDICATOR** (LS)
2.5
(ADVANCED BY 6 MONTHS, LS) TOTAL SOCIAL FINANCING IMPULSE*
20 19
CREDIT IMPULSE** (RS) (ADVANCED BY 9 MONTHS, RS)
1.0 2.0
15 1.5
14
.5
1.0
10
.5 9
0
0
5
4
-.5 -.5
April
2022 0
-1.0
-1
-1.0
-1.5
2021 -5 2021
2008 2010 2012 2014 2016 2018 2020 2022 2010 2012 2014 2016 2018 2020
*SHOWN AS A 12-MONTH MOVING AVERAGE; ANNUAL CHANGE *EXCLUDING EQUITY ISSUANCES;
**CUMULATIVE AGGREGATE FINANCING EXCL. EQUITY FINANCING, CALCULATED AS 12-MONTH CHANGE ON ANNUAL CHANGE
LGFV SWAP FROM 2015 TO 2018 AND LOCAL GOVT. SPECIAL BONDS ** BCA CALCULATION
ISSUANCE
CHART 21 CHART 22
Th Th Unit Unit
KM CHINA: CONSTRUCTION: KM CHINA FIXED-ASSET INVESTMENTS:
47 NEW LENGTH OF THE 220 KV & ABOVE 47 24 NUMBER OF MONTHLY NEW 24
TRANSMISSION LINES* PROJECTS APPROVED*
45 45 20 20
43 43
16 16
41 41
12 12
39 39
37 37
8 8
35 35
33 33
Weak
31 31 Record
low
2021 4 2021 4
2010 2012 2014 2016 2018 2020 2022 2016 2018 2020
*SHOWN AS A 12-MONTH MOVING TOTAL; * SOURCE: NATIONAL DEVELOPMENT & REFORM COMMISSION
SOURCE: NBS, CHINA ELECTRICITY COUNCIL

Strategy
China’s Business Cycle

Real estate developer financing has dried up, heralding a significant contraction in floor space completion,
i.e., construction activity. This will weigh on industrial commodities.
Further, Chinese economic weakness is broad-based, including a variety segments such as traditional
infrastructure and online retail sales. Exports are the only segment which has been booming.
CHART 23 CHART 24
Mn Ann% Ann% Ann%
Sqm TOTAL FUNDS FOR REAL ESTATE DEVELOPERS** Chg Chg CHINA: Chg
(ADV. BY 3 MONTHS, RS) INFRASTRUCTURE INVESTMENT:
1100 25 25
TRADITIONAL*
40
20 20
1060
30
15 15
1020
20 10 10
5 5
980
10
0 0
940 0
-5 -5
Weak
2021
900 -10
2012 2014 2016 2018 2020
*SHOWN AS A 6-MONTH MOVING AVERAGE;
CHINA: INCLUDES TRANSPORT, STORAGE & POST, WATER CONSERVANCY,
Mn
COMMODITY FLOOR BUILDING SPACE ENVIRONMENT & UTILITY MANAGEMENT, AND ELECTRICITY,
Sqm GAS & WATER PRODUCTION AND SUPPLY
COMPLETED* (LS)
? 4400
1100 INDUSTRIAL METAL PRICES (RS) CHART 25

4000 Ann% Ann%
Chg CHINA: Chg
ONLINE RETAIL SALES* :
1060 GOODS (LS)
3600 40 80
SERVICES (RS)
1020
3200 30 60
980
20 40
2800
940 10 20
2400
0 0
900
2014 2016 2018 2020 -10 -20

2021
*SHOWN AS A 12-MONTH MOVING TOTAL 2021
**SHOWN AS A 3-MONTH MOVING AVERAGE
***CUMULATIVE FLOOR SPACE STARTED MINUS FLOOR SPACE SOLD 2016 2018 2020 2022
FROM 1995 TO 2020; SOURCE: NATIONAL BUREAU OF STATISTICS *SHOWN AS A 3-MONTH MOVING AVERAGE

Strategy
Commodity Prices In China

Consistent with the ongoing slowdown in property and traditional infrastructure construction, raw
materials prices in China have been weakening. We believe more downside is likely.
CHART 26 CHART 27
RMB/ RMB/ RMB/ RMB/
MT STEEL REBAR MT MT THERMAL COAL MT
5000 5000
4500 4500 1500 1500
4000 4000
3500 3500 1000 1000
800 800
3000 3000
600 600
2500 2500
2000 CHINA: 2000 400 400

PRICES IN RMB
1600 1600
CHINA:
RMB/ RMB/ RMB/ PRICES IN RMB RMB/
MT IRON ORE MT Ton Ton
1100 1100 10000 10000
1000 1000
900 900 9000 9000
800 800
8000 8000
700 700
600 600
7000 7000
500 500
LOW DENSITY POLYETHYLENE
6000 6000
400 400
Th RMB/ Th RMB/ RMB/ RMB/

COPPER
MT MT Ton RUBBER WHOLESALE PRICES* Ton
68 68
64 64 18000 18000
60 60 16000 16000
56 56
52 52 14000 14000
48 48
12000 12000
44 44
40 40
10000 10000
36 36
Th RMB/ Th RMB/ RMB/ NICKEL RMB/

ALUMINUM
MT MT MT MT
140000 140000
120000 120000
18 18
16 16
100000 100000
14 14
12 12 80000 80000
10 2021 10 2021
2014 2016 2018 2020 2022 2016 2018 2020

*SOURCE: BEIJING DOMESTIC-MADE No.1 RUBBER

Strategy
Shrinking Chinese Imports Of Commodities

The resilience of commodity prices has not been due to China’s economy. The Mainland’s imports of
industrial metals and oil have actually been shrinking. Is this cycle different or have commodity markets
simply been complacent? We believe it is a bit of both.
CHART 28 CHART 29
Ann% Ann% Ann% Ann%
Chg COPPER AND COPPER PRODUCTS Chg Chg CRUDE OIL* Chg
80 80 70 70
60 60
60 60
50 50
40 CHINA IMPORT VOLUMES 40

40 40
30 30
20 20 20 20
10 10
0 0
0 0
-10 -10
-20 -30% -20
-20 -20
-40 -40 -30 Double digit -30

CHINA IMPORT VOLUMES*
contraction
Ann% Ann% Ann% Ann%
Chg Chg Chg Chg
160 40 ALUMINIUM ORE AND CONCENTRATE
100 100
140 35
120 STEEL PRODUCTS (LS) 30 80 80

IRON ORE (RS)
100 25
60 60
80 20 Recovered
60 15 40 40
40 10
20 20
20 5
0 0 0 0
-20 -5
-20 -20
-40 -10
2021 2021
2012 2014 2016 2018 2020 2022 2016 2018 2020 2022
*SHOWN AS A 3-MONTH MOVING AVERAGE *SHOWN AS A 3-MONTH MOVING AVERAGE

Strategy
US Core Inflation Will Remain Well Above The Fed’s Target

As commodity prices drop, the US headline inflation rate will decline. However, a drop in US core
inflation will be small, and this measure will likely remain comfortably above 3%, well above the Fed’s
target of 2%. The basis is that wages will be rising fast.
CHART 30 CHART 31
Ann% Ann% Ann% Ann%
Chg Chg Chg Chg
4.5 4.5
5 5
US: 5% US:
4.0 4.0
CORE CPI INFLATION MEDIAN CPI INFLATION
3.5%
3.5 3.5
4 4
3.0 3.0
3 3 2.5 2.5
2.0 2.0
2 2
1.5 1.5
1.0 1.0
1 1
2021 2021
1985 1990 1995 2000 2005 2010 2015 2020 1985 1990 1995 2000 2005 2010 2015 2020
CHART 32 CHART 33
Ann% Ann% Ann% Ann%
Chg Chg Chg Chg
5.0 5.0
4.6%
4.5 US: 4.5 US:
16% TRIMMED MEAN 5 CORE STICKY CPI INFLATION 5
4.0 CPI INFLATION 4.0
3.5 3.5 4 4
3.0 3.0 3.2%
2.5 2.5 3 3
2.0 2.0
2 2
1.5 1.5
1.0 1.0 1 1
2021 2021
1985 1990 1995 2000 2005 2010 2015 2020 1985 1990 1995 2000 2005 2010 2015 2020

Strategy
US Wages Are Accelerating

US wages are rising at a rate not seen in the past 35 years. Wage acceleration is broad based. High inflation
and a tight labor market have boosted employees’ bargaining power. As US wage growth approaches 5%,
productivity gains are unlikely to be substantial in preventing a spike in unit labor costs. A material rise in
unit labor costs will lead companies to hike their prices, reinforcing a wage-price spiral.
CHART 34
Ann% Ann%
Chg US EMPLOYMENT COST INDEX: Chg
PRIVATE INDUSTRY
4.5 4.5
WAGES AND SALARIES

4.0 TOTAL COMPENSATION 4.0
3.5 3.5
3.0 3.0
2.5 2.5
2.0 2.0
1.5 1.5
2021
94 96 98 2000 02 04 06 08 10 12 14 16 18 20 22
CHART 35
% Ann%
US: Chg
PRIVATE JOBS QUIT RATE* (LS)
ATLANTA FED WAGE TRACKER** (RS)
3.0
5
2.5
4
2.0
1.5
2
2021
02 06 10 14 18 22
*SOURCE: BUREAU OF LABOR STATISTICS
**SOURCE: FEDERAL RESERVE BANK OF ATLANTA

Strategy
Mainstream EM (ex-China, Korea, Taiwan)

Monetary tightening in a number of developing countries, high real interest rates in the ASEAN region,
and tighter fiscal policy across mainstream EM will all depress money and credit growth, which are
already at all-time lows in both nominal and real terms.
All in all, domestic demand in mainstream EM is set to disappoint in 2022.
CHART 36 CHART 37
Ann% Ann% Ann% Ann%
Chg Chg Chg Chg
EM EX-CHINA, KOREA AND TAIWAN
24 EM EX-CHINA, KOREA AND TAIWAN*: 24
24 24
PRIVATE CREDIT GROWTH*:
NOMINAL TERMS
20 BROAD MONEY: 20 REAL TERMS**
20 20
NOMINAL TERMS
REAL TERMS**
16 16 16 16
12 12
12 12
Record
8 8
lows
8 8
New 4 4
lows
4 4
0 0
2021 2021
04 06 08 10 12 14 16 18 20 22 04 06 08 10 12 14 16 18 20 22
*SHOWN IN LOCAL CURRENCY; *EQUITY MARKET-CAP WEIGHTED OF 16 EMERGING ECONOMIES
EQUITY MARKET-CAP WEIGHTED OF 16 EMERGING ECONOMIES **DEFLATED BY CORE CPI
**DEFLATED BY CORE CPI
CHART 38 CHART 39
Bn %
US$ EM EX-CHINA,KOREA AND TAIWAN: 250 250
3.0
RETAIL SALES VOLUME**
80 CAPITAL GOODS IMPORTS* (LS)
3.5
SHORT TERM RATES 240 240
(INVERTED; RS) 4.0 Has not
75 surpassed
4.5 230 pre- 230
pandemic
70 5.0 level
220 220
5.5
65 6.0
210 210
6.5
60
7.0 200 EMERGING MARKETS 200
EX-CHINA, KOREA AND TAIWAN*:
7.5
55
8.0 190 190
2021 2021
12 14 16 18 20 22 12 14 16 18 20 22
*EQUITY MARKET CAP-WEIGHTED OF 16 EM ECONOMIES; *EQUITY MARKET CAP-WEIGHTED OF 16 EM ECONOMIES
SHOWN AS A 3-MONTH AND 12-MONTH MOVING AVERAGE **SHOWN AS A 3-MONTH MOVING AVERAGE

Strategy
Mainstream EM: Fixed-Income, Currencies And Inflation

A hawkish pivot by the Fed and depreciating EM currencies will keep pressure on EM central banks to
hike rates further. This will depress domestic demand in mainstream EM economies. Even though local
currency bonds are becoming attractive from a valuation perspective, the timing to enter this asset class
depends on a bottom in EM exchange rates. Odds are that EM currencies have more downside for now.
That said, a buying opportunity in EM domestic bonds will likely emerge in H1 2022.
CHART 40 CHART 41
EMERGING MARKETS
230 230 LOCAL CURRENCY BOND
320 TOTAL RETURN INDEX IN US$* 320
220 220
310 310
210 210
300 300
200 200
290 290
190 190
280 280
180 180
270 270
170 170 260 260
250 250
160 160
EMERGING MARKETS EXCLUDING
240 240
CHINA, KOREA AND TAIWAN*:
150 150
TOTAL RETURN CURRENCY INDEX**
230 230
2021 2021
06 10 14 18 22 10 12 14 16 18 20
*MARKET CAP WEIGHTED OF 16 EMERGING ECONOMIES CURRENCIES *JP MORGAN GBI-EM GLOBAL DIVERSIFIED COMPOSITE;
**MARKET CAP WEIGHTED OF 16 EMERGING ECONOMIES CURRENCIES SOURCE: J.P. MORGAN CHASE & CO.
INCLUDING CARRY; REBASED TO 100 AT JANUARY 2000;
SOURCE: BLOOMBERG FINANCE L.P.
CHART 42
Ann% %
Chg EMERGING MARKETS EXCLUDING
10 CHINA, KOREA AND TAIWAN*: 10
CORE CPI (LS)
LOCAL CURRENCY GOVERNMENT BOND YIELD** (RS)
9 9
8 8
7 Upside risk in 7
near-terms
6 6
5 5
4 4
3 3
2 2
2021
04 06 08 10 12 14 16 18 20 22
*EQUITY MARKET CAP WEIGHTED
OF 16 EMERGING MARKET ECONOMIES
**SOURCE: J.P. MORGAN CHASE & Co.; 10-YEAR GOVT BOND YIELDS USED
FOR CHILE & INDIA

Strategy
EM Credit Spreads
EM credit spread widening has so far been selective, concentrated among HY issuers. As EM domestic
demand disappoints, commodity prices drop and EM currencies depreciate, EM credit spread widening
will become broad based. Credit investors should avoid buying USD bonds of Chinese property
developers. There will be more turmoil among Mainland real estate developers.
CHART 43 CHART 44
% BPs Ann% BPs
Chg EMERGING MARKETS CURRENCY
vs. US$* (LS)
52 300
5 300
400
50 0
400
500 -5
48
500
EMERGING MARKETS: 600 -10

MANUFACTURING PMI* (LS)
46
SOVEREIGN US$ CREDIT 600
SPREADS** (INVERTED, RS) -15
700 EMERGING MARKETS
44 CORPORATE SPREAD**
700
-20 (INVERTED, RS)
800
2021 2021
12 14 16 18 20 14 16 18 20 22
*SOURCE: MARKIT ECONOMICS *BLOOMBERG BARCLAYS INDEX CORPORATE AND QUASI-
**SOURCE: BLOOMBERG BARCLAYS INDICES SOVEREIGN BOND INDEX MARKET CAP-WEIGHTED OF 19 EMERGING
MARKET CURRENCIES
**SOURCE: BARCLAYS BLOOMBERG INDICES
NOTE: ALL SERIES SHOWN AS A 5-DAY MOVING AVERAGE
CHART 45 CHART 46
BPs BPs
INVESTMENT GRADE CREDIT
EMERGING MARKETS* US$ CORPORATE SPREAD:
HIGH YIELD 115 380 1300
INVESTMENT GRADE (LS)
CREDIT
105 360 HIGH YIELD (RS)
110 1200
340
105 1100
100 320
100 1000
300
95 95 280 900
90 260 800
90 85 240 700
220
80 600
85 200
75 500
RELATIVE EXCESS RETURN 180
EMERGING MARKETS SOVEREIGN & 70 400
80 160
CORPORATES vs. US CORPORATES* ?
65 140 300
2021 2021
2000 04 08 12 16 20 14 16 18 20 22
*SOURCE: BLOOMBERG BARCLAYS INDICES *SOURCE: BLOOMBERG BARCLAYS INDICES

Strategy
Archive Of Previous Reports
Please click on the links below to view reports:
1. On US Inflation, Shortages And EM - November 4, 2021

2. On Chinese Internet Stocks, Real Estate And Overall EM - September 16, 2021
3. Inflation In Emerging Economies - July 22, 2021
4. The US Dollar As A Litmus Test - June 17, 2021
5. A Double Whammy For EM - May 13, 2021
6. Growth Divergence: Booming US, Slowing China - April 1, 2021
7. Mind Rising Bond Yields - February 18, 2021
8. Inflation Holds The Key - January 21, 2021
9. Charts That Matter: Crosscurrents - December 17, 2020
10. Charts That Matter: Peak Sentiment - November 19, 2020
11. A Tug-Of-War - October 15, 2020
12. Charts That Matter - September 10, 2020
13. Technical And Valuation Charts That Matter - March 13, 2020
14. Charts That Matter - February 27, 2020

Strategy
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Shape Your ConvictionTM

Charts That Matter December 16, 2021

EM: A Perfect Storm

lower. 300 300

• Tight monetary and/or fiscal policy 250 250

settings in mainstream EM (ex-China,

• US equity market breadth has been 100 100

Daniel Soto SURA ASSET MANAGEMENT S.A. 753323

China’s Slowdown And Stimulus CHART 2

• Chinese TMT share prices appear to be 30 30

breaking below their three-year moving

companies’ trailing P/E ratio is still 35. 50 50

They are not cheap and more de-rating is 45 45

• The MSCI emerging Asian equity index’s 30 30

emerging Asia. Granted emerging Asia 2014 2016 2018 2020

index, it will be impossible for EM to

Daniel Soto SURA ASSET MANAGEMENT S.A. 753323

However, the long end of the US yield curve

higher long-term bond yields. .2

uncertainty – the US bond term premium -.6 2.6

Daniel Soto SURA ASSET MANAGEMENT S.A. 753323

180 180 20 25% 20

160 160 % OF STOCKS ABOVE 200-DAY MOVING AVERAGE

2018 2020 2022

40% respectively (Chart 5). This signifies 50 50

Daniel Soto SURA ASSET MANAGEMENT S.A. 753323

Profile Of EM Stocks Is Troublesome

120 EMERGING MARKETS: 120 EMERGING MARKETS:

EMERGING ASIA NON-TMT*

Daniel Soto SURA ASSET MANAGEMENT S.A. 753323

2600 2600 .015 .015

2400 2400 .014 .014

1800 1800 .011 .011

1600 1600 .010 .010

900 900 Feb 2021

700 700 900

2017 2018 2019 2020 2021 2018 2020

Daniel Soto SURA ASSET MANAGEMENT S.A. 753323

1050 1050 NYSE STOCK INDEX:

750 750 9.4

550 550 9.1

2018 2019 2020 2021 2018 2020

Daniel Soto SURA ASSET MANAGEMENT S.A. 753323

China/EM Liquidity Cycles And Share Prices

2010 2012 2014 2016 2018 2020

7.4 STOCK PRICES* IN US$ (LS)

2008 2010 2012 2014 2016 2018 2020

Daniel Soto SURA ASSET MANAGEMENT S.A. 753323

Chinese Stimulus: Mind The Time Lag

Daniel Soto SURA ASSET MANAGEMENT S.A. 753323

China’s Business Cycle

1100 INDUSTRIAL METAL PRICES (RS) CHART 25

2014 2016 2018 2020 -10 -20

Daniel Soto SURA ASSET MANAGEMENT S.A. 753323

Commodity Prices In China

2000 CHINA: 2000 400 400

Th RMB/ Th RMB/ RMB/ RMB/

Th RMB/ Th RMB/ RMB/ NICKEL RMB/

2014 2016 2018 2020 2022 2016 2018 2020

Daniel Soto SURA ASSET MANAGEMENT S.A. 753323

Shrinking Chinese Imports Of Commodities

40 CHINA IMPORT VOLUMES 40

-40 -40 -30 Double digit -30