Emerging Markets Outlook Stabilizes as Equity Returns, Commodities Prices Rise Slightly

A long stretch of low interest rates has helped lead equity funds investors to pour money into emerging markets for the past seven weeks, and its part of the reason why Moody’s Investors Service recently announced the outlook for emerging markets has stabilized. A modest recovery in commodities prices and an improved near-term outlook for growth in China have also led the ratings agency to improve its forecast for the region.

As China ramps up “significant fiscal and monetary policy support,” Moody’s expects the Chinese economy to grow at 6.6% this year and by 6.3% in 2017, revised slightly higher from the ratings agency’s prior forecast. "The slowdown and rebalancing of China's economy is likely to be gradual," said Madhavi Bokil, a vice president and senior analyst at Moody's. "Thus we do not expect China to exert a significant drag on global growth prospects over the rest of 2016 and in 2017."

Likewise, Moody’s sees improvement in the Japanese economy thanks to recent fiscal stimulus and ongoing expectations of monetary easing in the country with modest expectations for 0.9% growth by 2017, though deflation and subdued private consumption remain serious concerns.

The downside to these predictions is that any sudden shift in monetary policy or uptick in political risks could re-inject turmoil into international and emerging markets. "Emerging market economies experienced sharp reversals of capital flows when the Fed announced it was tapering asset purchases in 2013, and again last year before the US policy lift-off," said Elena Duggar, an associate managing director at Moody's. "Financial market turbulence could easily return when the US rate increase cycle resumes or political risks crystallize."

- Nicholas Stern, editorial associate

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