Cyclical factors align for EM outperformance - Aug. EM/DM Leading Indicator Watch

EM economies are driving the improvements we are seeing in global growth and liquidity, while our inflation leading indicators are edging lower for most major DM and EM economies. The tailwind for risk assets is intact as the synchronized global easing cycle broadens out, and our liquidity-driven regime model now favors EM over DM equities for the first time since 2018. We reiterate our long exposure in Brazilian and Indian equities; long KRW (vs CNH) and long CAD (now vs JPY); and long 2-year UK bonds. We are adding short AUDUSD based on tactical and cyclical model alignment.

Summary by Country:

• UK: Downside risks to growth, inflation fears overblown, yields too high
• Japan: Signs of peak inflation, path of least resistance is a weaker yen
• Canada: Growth LEI turns higher, switch from long CADCHF to long CADJPY
• Australia: Falling inflation to keep RBA easing, short AUDUSD on tactical/cyclical alignment
• India: US-India tensions a chance to add to long equity exposure
• Brazil: Still long equities as focus shifts from inflation to growth
• Mexico: Drop in bond yields justified by falling growth and inflation
• South Korea: Fiscal still boosting growth, but LPPL bubbles suggest tactical caution on equities