Will The Strong Decline In Real M1 Weigh on EM Financials?

• The surge in ST rates amid aggressive tightening cycles run by EM central banks (Latam/CEEMEA ex-Turkey) to combat inflation has been driving financial equities to new highs in recent months.
• EM MSCI Financials (MXEF0FN index) broke above its key resistance at 351.10 (61.8% Fibo retracement of the 223.80 – 429.80 range) in January and recently tested its 366.74 resistance, which corresponds to the June 2018 highs.
• While new highs in ST rates combined with 'easing' geopolitical tensions could continue to support EM financial equities in the short term, the sharp contraction in China M1 money supply questions the sustainability of the momentum in EM cyclical stocks.
• We saw earlier this month that China M1 money supply contracted sharply by 1.9% YoY in January (vs. +3.2% exp.), down from +3.5% the previous month, its first decline in data since 1997.
• The downturn in M1 was mainly driven by a 5.3% drop in corporate deposits (represents 80% of M1 supply) attributed to the Lunar New Year as companies generally give employees bonuses before the holiday (transferring money from corporate to consumer accounts).
• Even though there is a strong seasonality in January data due to the Lunar New Year, momentum on money supply (M1) has been falling in the past year, which historically had strong implications for domestic and international asset prices.
• The chart below shows that China real M1 money growth, which we compute as the difference between M1 YoY and PPI inflation, has strongly led EM cyclical stocks (financials) by 6 months in the past cycle.

Source: Bloomberg/MNI