EM Head For The Entrance!

When everyone else yells 'sell', start to think differently. EM are not yet in a sweet spot but this could come early in Q3. We figure that 'cyclical economic recovery' is the message from skidding bond markets. This is entirely consistent with our data showing rising liquidity. On top, we expect EM currencies to weaken as local policy-makers begin to ease. This may worry EM bonds, but EM equities will benefit. Third, the main historic driver of the Asian business cycle is the Yen. This plunged in Q1 and Q2, but should now stabilise. A flatter Yen is a great base for EM to build upon. What could go wrong? Our main worry concerns a too strong US dollar, but if our hunch that we are in a 'normal' economic recovery proves correct, the US dollar may soften over coming quarters as the US current account deficit again starts to swell.