Morgan Stanley IM: Emerging Markets - Don't Judge a Book by its Aggregates

A recent Bloomberg article[1] quoting economist Carmen Reinhart has raised concerns about the health of emerging market economies. In the following piece, Morgan Stanley Investment Management’s Emerging Market Debt team addresses some of her statements as well as other popular misconceptions about emerging markets.

"The overall shape they [emerging markets (EM) economies] are in has a lot more cracks now than it did five years ago and certainly at the time of the global financial crisis," 

We do not have access to the data sources underlying Carmen Reinhart’s statement but we suspect that the deterioration she perceives in EM is partly due to the large weight of the Chinese economy in EM. As has been widely discussed, China is undergoing a rebalancing toward lower investment and more consumption, inevitably associated with lower growth and reduced current account surpluses, and that has a sizable influence on EM aggregate data. 

However, the share of China in EM fixed income’s investable universe is much smaller than its representation in EM’s gross domestic product (GDP) (China currently represents 0% of the JP Morgan GBI-EM index, 9% of the JP Morgan EMBIG and 8% of the JP Morgan CEMBI versus the 31% share of the Chinese economy in EM’s aggregate GDP). Therefore, and without downplaying the importance of China in the global economy, we recalculate EM aggregates for key macroeconomic variables (using the International Monetary Fund’s (IMF’s) World Economic Outlook (WEO) data) according to the country’s shares on each of our three EM debt benchmarks. We believe that these adjusted EM metrics provide a better gauge of investment-relevant EM macroeconomic performance.

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[1] Harvard's Reinhart Says Emerging Markets Worse Than '08 Crisis, Bloomberg, May 16, 2018.