A seven-factor checklist for assessing the relative attraction of emerging market equities is giving the most promising message since 2016. The table compares current judgements about the factors with the position in mid-2018, when commentaries here expressed caution about EM equities.

In addition to a favourable global monetary backdrop and improving economic prospects, EM equities are cheap, earnings estimates have held up better than in developed markets and commodity prices appear to have bottomed – see charts.

Surging US money growth, meanwhile, has quenched excess demand for US dollars, raising the prospect of a decline in the US currency – icing on the cake of a bullish EM scenario.

A much stronger monetary pick-up in the US than China explains a negative gap between E7 and G7 real money growth – the sole unfavourable checklist factor. The sign of the gap has correlated with EM relative performance on average historically but there is a case for downplaying the signal when money growth in the two groups is moving fast in the same direction. A similar set-up in 2009 – a joint surge but with the G7 leading – was associated with EM outperformance.

Within EM, markets that typically outperform in global economic upswings include Russia, Indonesia, Brazil and Korea. Money growth is strong in all four cases.

EM relative performance correlates directionally with the developed markets metals and mining price relative, with the latter often leading at bottoms and giving a positive signal currently – fourth chart.

Incoming monetary news remains strong, supporting the expectation here of a V-shaped global economic recovery accompanied by buoyant markets and an inflationary pick-up in 2021-22.

Sceptics argue that monetary growth has been weakly correlated with inflation in recent decades while velocity is in secular decline.

With respect to the former, monetary growth shapes the medium-term inflation path not short-term movements. The trend decline in broad money growth in the 1980s / 1990s and subsequent stability laid the foundation for sustained low inflation in the 2000s. The current monetary upsurge is unrivalled since the 1970s. Statistical results based on the period of relative monetary stability are unlikely to be reliable.

Regarding the velocity decline, this reflects the diversion of money into asset markets, as explained by the “quantity theory of wealth”. Economic pessimists expecting the velocity downtrend to accelerate fail to recognise that this would imply an asset price boom.

Most countries have now released April monetary data (the UK is late, as usual). Six-month growth rates of “global” (i.e. G7 plus E7) real narrow and broad money are estimated to have risen further to 9.6% and 8.1% respectively (not annualised), surpassing highs reached before the post-GFC economic rebound – see first chart.

The global money measures extend back to the 1990s. The second chart shows G7-only nominal money growth data over a much longer period. Annual broad money growth of 13.6% in April was the strongest since 1976 while narrow money growth of 16.1% marked a post-WW2 high.

The monetary upsurge has been led by the US but growth has also sky-rocketed in Australia, Canada, Sweden, Brazil, Russia and Korea with smaller but still significant increases elsewhere – third and fourth charts.

Weekly data suggest that US annual broad money (M2+) growth will reach 25% in May. On the conservative assumption that the money stock remains static from May, growth in 2020 would average 19%, exceeding a prior peacetime peak of 17.5% in 1881 during the Gilded Age economic boom – fifth chart.

The consensus forecast of weak nominal GDP prospects would imply an unprecedented rupture of the money / nominal GDP growth relationship shown in the chart.