Weekly Intelligence Report – emerging markets rebound and consumer credit

14 Jun 2016

In this edition of the Weekly Intelligence Report we have two contributions with very different but timely perspectives – the first a top down macro analysis of the health of the emerging market economies and the second a bottom up micro perspective on the state of the US economy.

In the first article Joost Van Leenders takes the pulse of economic activity in emerging markets and finds cause for concern. Sentiment on emerging markets (EM) has oscillated wildly in recent months, from the doom and gloom that pervaded markets at the beginning of the year, to a more optimistic assessment in the spring that has more recently given way to a renewed sense of caution. Joost sees few grounds for optimism about the near-term prospects for growth in EM: he argues the best case scenario for China is growth stabilisation, Brazil is still mired in recession and the state of the Indian economy is likely flattered by the data. Unfortunately, we may have to wait a little while longer before the much anticipated rebound in activity and earnings materialises in EM. On that basis, Joost cautions that it is too soon to go overweight EM equities and favours an underweight in dollar-denominated EM debt, where in his view spread compression has over-shot fundamentals.

In the second article, Dan Singleman peers under the bonnet/hood of the US economy using a valuable source of microdata: the Senior Loan Officer Opinion Survey on Bank Lending Practices. This report provides a regular update on the state of US credit markets, describing the evolution of the demand for and the supply of credit at a quarterly frequency, which can provide useful cross-check on the health of the economy. The latest data point to a selective tightening in credit conditions which some analysts have argued could signal a looming recession. However, Dan argues that this conclusion is premature and that the tightening in credit conditions thus far should only present a headwind to growth rather than presaging an outright contraction. On a more optimistic note, delinquency rates on credit cards and auto loans remain low, reflecting the supportive backdrop of an improving labour market, solid consumer confidence and low interest rates. However, looking further ahead Dan identifies the risk posed by the outstanding stock of student loan debt, which may pose a significant drag on spending of cohorts who may struggle to finance the purchase of a home or to save for retirement.

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