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Not very flash, we are afraid. We think equities EM give us around 3% returns next year, sovereign and hard currency bonds 0-2% (though with less volatility than equities), while local currency bonds will likely give returns between -2 to 0%, thanks to weakness in currencies.
Will EM create a global recession next year?
It is highly unlikely. First, large DM economies are closed relative to EM economies, which are much more trade driven. Second, and more importantly, a credit problem in DM impacts EM credit conditions much more so than the other way round. The world is USD financed, not Renminbi financed.
EM stocks have underperformed for 5 years, like '97-'01. Is this the right time to buy?
We are afraid not. From 2002-2009 we saw the growth premium of EM over DM rising, US real interest rates falling and commodity prices pushing higher. All of these factors are now going the other way, and EM balance sheets are worsening. EM's performance should be less bad in 2016, but it should still underperform developed markets.
To what extent has EM healed?
Real rates have risen, which may help savings rates, while improved current accounts reduce risks of sudden stops. There are signs of capital discipline at a firm level as capex has weakened. But there has been little deleveraging, trade is weak, unit labour costs have not fallen much, and China remains a drag on commodities.
Can EM currencies have a better year in 2016?
After a 15% decline in GBI EM FX year to date, we would have to say yes. But we have found limited evidence of EM currencies overshooting and most of the fundamental headwinds remain in place. We expect 5-6% losses for GBI and MSCI weighted EM FX in 2016 vs. the US Dollar.
How big are EM hard currency debt maturities next year?
The accumulated hard currency debt coming due for EM (sum of 70 countries), including bonds (ex-trade credits) and loans is approximately $570 bn. This compares with estimated refinancing needs of $350-400 bn over 2014 and 2015 each. The average annual refinancing need over 2017-2019 is $ 500bn.