Falling Real Money Growth To Weigh on EM Cyclical Stocks

• In recent months, we have seen that the slow vaccination campaign in the EM economies was likely to weigh on growth expectations due to the surge in uncertainty over the Delta variant.
• While Western central banks maintain a 'hawkish' tone, Asia / SE Asian policymakers have become increasingly dovish in recent weeks:
  • Last month, PBoC cut its RRR rate to big banks by 50bps to 12% to ease financial conditions as the economy has been decelerating since February.
  • Bank of Thailand also sounded more dovish in its latest meeting, with 2 policymakers voting for a 25bps cut to help support the economy last week (while the 4 other policymakers voted for the BoT to keep its benchmark steady at 0.5%). BoT is likely to cut rates if the Covid situation deteriorates in the coming weeks.
  • Growth expectations are also likely to be downgraded in Indonesia in the near term after the government recently announced that social restrictions will be extended by up to two weeks amid death toll concerns.
• Hence, the monetary policy divergence between Western and Asian economies could continue to support the US Dollar in the near term and therefore weigh on EM risky assets, especially equities.
• Important economic data to watch this week is China M1 money growth, which is expected to decelerate to 5.4% July (from 5.5% the previous month).
• With inflationary pressures remaining elevated in China, with PPI inflation coming in higher than expected in July at 9% YoY (vs. 8.8%), real money growth will continue to fall and therefore could weigh on EM cyclical stocks such as financials.
• The chart below shows that China real M1 money growth, computed as the difference between M1 and PPI inflation, has historically acted as a strong leading indicator of EM financials stocks.

Source: Bloomberg/MNI