From a short-term cyclical standpoint, investors remain quite focused on China and, as a consequence, the emerging markets (EMs). Given the huge structural issues facing China in the long run, that concern is understandable but misplaced for the near term.

Instead, the parts of the global economy that have the potential to surprise to the downside in terms of economic growth, in my view, are the developed markets (DMs) – especially the U.S. – and not EMs.

As has been the norm since the financial crisis of 2008, faced with an imminent slowdown in its industrial economy, China turns on the stimulus spigots, both the monetary and fiscal kind. And whether we like it or not, China’s latest policy moves are getting traction. You can see evidence of that in the official statistics – China’s purchasing managers index (PMI), for example, fell slightly in April but remained above 50, signaling an expansion for the second straight month. If you don’t believe the PMI, look at stock market pricing signals. Even the most distressed sectors – steel, cement, materials, energy – are showing signs of life, almost on cue.

In fact, you can see the most relevant evidence of the turn in China’s growth in speculation by Chinese investors and corporate entities. Prices of raw materials and property in China have firmed up so much that authorities have had to promulgate new policy initiatives to tamp them down. There is no better proof of the turn in underlying cyclical activity.

Chinese Economy in Transition

To be sure, none of this changes the longer term structural issues China faces. The Chinese economy will eventually have to slow to make the transition to a more resilient consumer-driven economy, but that will not happen any time soon. Call it kicking the can down the road if you like, but signs of the cyclical turn in the Chinese economy are evident everywhere.

Given its policy flexibility, political motivations and sheer will, China has the capacity to push things out, and that is precisely what it is doing at the moment. Given the typical lags in such a large economy, this cyclical push is likely to last a few more quarters if not longer. The proverbial day of reckoning is coming, but not this year, in my view, and no Minsky moment1 will occur in 2016.

The turn in Chinese growth, as you would expect, is helping the rest of the EMs as commodity prices stabilize and exports to China certainly help the outlook for most EMs in Asia and Latin America.

The bottom line is that for the next few quarters, given just the current momentum alone, the outlook for EM risky assets – equities, currencies and credit – remains quite positive.

The Fed and Slowing U.S. Growth

That brings us to the DMs. If there is reason to worry – and as we all know, there is plenty of reason to worry in this slow growing world – it is in DMs, especially the U.S.

As has been the trend over the last few years, U.S first-quarter growth has been substantially lower than expectations. That certainly held true in 1Q 2016. However, as has also been the trend, expectations are that U.S. growth will recover and not disappoint for the full year.

I would argue while that may indeed turn out to be the case again this year, there is good reason to assign a higher-than-usual risk to that presumption. Here’s why: The slowdown in U.S. first-quarter growth over the last few years was explained by the effects of poor weather and other seasonal factors. However, this year has been different. The effects of weather and seasonal factors have been much more muted. Instead, the driver has been a softening in overall consumption. Employment and income growth are strong, but consumption has been softening and savings rates have been inching up. The best evidence of that is in the auto sector, which seems to have peaked.

I believe these trends are the results of the lagged impact of the Federal Reserve’s (Fed) misguided effort to tighten policy in 2014-2015 and the ensuing strength of the dollar.

However, all is not lost. I believe the Fed is cognizant of this economic driver and its moves and statements over the last few months – especially Fed Chair Janet Yellen’s speech in March – recognize this potential headwind. In my view, there is good reason to believe that, given the outlook for a slowing U.S. economy, we will not see any further Fed tightening this year.

Finding Value in Emerging Market Equities

As a result, I believe it is quite likely that U.S. economic growth trends will stabilize – not accelerate, but stabilize. Given the recent run up in U.S. risky asset prices after February’s lows, my expectation is that they will generate decent but not spectacular returns.

To put it all together, the bottom line is that global growth is likely to be modest at best in 2016. EM economies are going through a cyclical rebound while DM economies, especially the U.S., are slowing.

From a tactical asset allocation standpoint, given the potential risk from a U.S. slowdown and current valuations, EM equities may be a better value than U.S. equities.

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1 A Minsky moment is a sudden major collapse of asset values, usually triggered by long periods of prosperity and rising investment values that lead to increasing speculation by investors using borrowed money. The term is named after U.S. economist Dr. Hyman Minsky, who authored a May 1992 paper titled “The Financial Instability Hypothesis,” in which he identified this trend.