Emerging Market (EM) equities hit a low in January but since then have been driven higher by U.S. Federal Reserve Bank (Fed) communication, US dollar (USD) weakness, and economic data, particularly from China. Communications from the Fed have become increasingly dovish, leading to a weaker USD against many currencies, which caused commodities to rally and cyclical industries to outperform. The rally in commodities and cyclical sectors was also supported by economic data out of China. Market participants remain skeptical on the sustainability of this environment and the second half of the year will prove pivotal. The purchasing manager’s index (PMI) in most EM countries remains around the 50 mark, indicating that growth is still sluggish. Mirae Asset believes that for the outperformance of the asset class to continue, the growth differential between emerging and developed markets needs to widen again. For this to be sustainable, Chinese growth needs to contribute more to global trade. One bright point is that even though leading indicators are not yet suggesting strong growth, earnings revisions appear to have bottomed out.
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