Emerging market equities are slightly ahead of developed markets year-to-date but relative monetary trends question whether outperformance can continue.

The first chart shows the ratio of MSCI's emerging markets index in US dollars to its developed markets index, together with the six-month rates of change of real narrow money M1 in the G7 and seven large emerging economies. Emerging markets outperformance during the 2000s occurred when E7 real money growth was higher than G7 growth or was rising strongly. The E7 / G7 gap has been mostly negative during the sustained relative bear market since 2010.



Current conditions are unpromising, with G7 real money growth higher and rising strongly but E7 growth down sharply in December.

Weakness in the E7 aggregate is due to real M1 contraction in Russia, Brazil and China, and a recent slowdown in India. By contrast, monetary trends are strong in Korea, Mexico and Taiwan – second chart.



Russian real M1 fell by 9.1%, or 17.4% annualised, in the six months to December, reflecting both nominal money contraction and a currency-driven inflation surge. The economy was temporarily supported by panic spending of rouble money balances at end-2014 but industrial output should slump in early 2015 – third chart.