Emerging Markets Insight

Big data and a tale of two reflations

Jul 12, 2017
By Gerardo Rodriguez, Jeff Shen, PhD, Stephanie Lee

Emerging market highlights

  • While emerging markets (EM) continue to outperform, the U.S. markets are beginning to question the narrative of reflation.
  • Our measure of text-based broker sentiment shows that reflation `chatter’ in the U.S. has come down 45% since its peak in Q4 2016 while China appears to be holding up.

Market overview

The reflation narrative has been gradually moving from the U.S. to China. As we have argued before, the recent out-performance of EM equities can be explained by a broad acceleration of economic growth, which is now evident not only in manufacturing activity but also in global trade.

Although the concept of reflation became a popular theme in the U.S., especially after the presidential election, there is growing evidence that China, rather than the U.S., has been leading the way. In fact the prevailing low levels of long end UST rates appear to be challenging the notion that the U.S. economy has the capacity to improve further.

We used text-based sentiment to test the concept of reflation in the U.S. and in China. Every month we analyzed more than 125,000 broker research reports and use natural language processing techniques to detect attention on or “chatter” about topics as they emerge from the content of the research reports over time. We find that the U.S. has become less associated with reflation in 2017, and currently analysts’ reflation ‘chatter’ has decreased by half (see graph below). At the same time we observe that the ‘chatter’ for China has been holding up YTD, only marginally off its peak last February.

This confirms other evidence that suggest China has been the epicenter of the recent improvement of global economic conditions, particularly with a strong acceleration of imports, which has been growing at close to 15% over the past 12 months.

At the same time, markets appear to be losing patience on the possibility of a major tax reform or a wave of deregulation from the U.S. that would contribute to improved company profitability. Prospects for the pace of monetary policy normalization by the Fed are being reassessed and we may slide back into a ‘lower for longer’ regime.

To the extent that China continues to stabilize at an above average rate of GDP growth, a low interest rate environment should prove to be a constructive environment for EM assets to continue outperforming.

Reflation ‘chatter’

Reflation ‘chatter’

Source: BlackRock, Thompson Reuters. As of June 2017.

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