As the political turmoil and high stock valuations in the U.S. create an uncertain market for investors, emerging markets appear to be facing a goldilocks global environment. Fairly synchronized growth recovery, low inflation and amply accommodative monetary policy in advanced economies have created a sweet spot for the developing nations.
Indeed, growth is picking up in advanced economies, which is good for emerging markets as it boosts global trade. With the pace of global industrial production having doubled from a year ago, advanced economies are seeing the most improvement. A future growth slowdown could hurt emerging markets, but these clouds are distant at the moment.
Despite the current recovery, inflation in advanced economies remains remarkably subdued, and looks less likely to hit the official targets as early as the authorities had hoped. The U.S. economy remains on solid footing, but inflation and wages have continued to weaken, and several arguments suggest wages could remain softer for longer, which would work against global central bank removing the international liquidity punchbowl too fast. In the Eurozone, headline inflation remains below target too. In Japan, for its part, zero-rate inflation expectations are deeply ingrained.
Luckily for emerging markets, global monetary policy conditions remain amply accommodative (low interest rates) by historical standards, and normalization in coming quarters should be very gradual.