EM: Just a relief rally but no lasting correction – RBS

By FXStreet FXStreet (Delhi) – Gabor Ambrus, Market Economist at RBS, notes that the ECB President Draghi’s dovish message has triggered a correction but the question is whether this marks a reversal in the EM bearish trend or it is just a temporary relief rally.

Key Quotes

“Contrary to those who believe that this is the beginning of a correction to more ‘normal’ EM valuations, we believe that normal is what we see now, but markets need time to get used to the levels to perceive them as normal.

We maintain our broadly bearish EM stance, although we acknowledge that there are bright spots too, which continue to show resilience in the face of headwinds. We identified four factors that weigh on EM and which need to change to reverse the outlook:

(1) Risk-reward mismatch

(2) EM growth deficit

(3) US rates outlook and expectation for USD strength

(4) Chinese slowdown and capital outflows

We argued that all four factors are pushing EM in the same direction, creating something of a perfect storm, especially for EM commodity producers. We suggested that it may take several quarters before we see signs of change for the better. This storm was amplified by poor liquidity conditions, in part related to regulatory …read more

Source:: FX Street