China's economy likely slowed much more than the official statistics show; otherwise, the government would not have reversed course on its various crackdowns, especially on the property market. It also sharply accelerated infrastructure projects and the PBOC cut rates and pushed banks to increase mortgage lending. We expect the economy to stabilize and achieve a 6.7% HoH SAAR growth rate (equating to 6.8% YoY) in the 1H15, although this is below consensus of 7.0%. 2H15 growth should be even slightly better at 7.0% HoH SAAR. Along with government and PBOC stimulus, the decline in oil prices should also greatly benefit China. Meanwhile, the CPI has decelerated sharply (and suggests that housing rents are barely rising, which is somewhat dubious), and pipeline inflation remains negative. Exports have rebounded a bit recently, while imports in value terms are suppressed mostly by lower commodity prices. Housing starts are declining rapidly, but the backlog of orders should support the economy, at least through the 1H15. Auto sales, on the other hand, remain quite firm and it will be crucial to watch this trend going forward.

There is a risk that the China story could worsen despite the government's attempt to re-stimulate it. The shine has greatly worn off the housing market and credit conditions for a significant portion of individuals, corporations and local governments remain strained. Industrial production will continue to be constrained so as to reduce pollution and we continue to expect (as we have for several years) that huge efforts will be made, even beyond current optimistic projections, on solving this problem. However, China's recent reform efforts should greatly improve the prospects for economic growth in 2015. Reducing bureaucracy and emphasizing quality of growth over the quantity of growth, will likely to increase investor and business confidence, leading to increased capital expenditure on advanced machinery and systems control software. In particular, the services sector in China has immense potential and will therefore likely continue to be the main engine of growth for this economy.

The geopolitically driven drop in the price of oil (with the Saudis wishing to punish Iran and Russia) has greatly changed the outlook for many emerging economies. A few vulnerable countries are already in crisis, including Russia and Venezuela, and the prospects for several others are negative. Fed rate hikes and a stronger USD will be headwinds, as well. Oil importing countries, especially in Asia, should benefit, but several are large commodity producers that are being hurt currently. However, as stated earlier, we expect commodity prices to rebound in the 1Q15 and through 2015, which should prevent a major crisis, although, overall, they will remain much lower than mid 2014 levels, so it is hard to be too enthusiastic about currently struggling countries. In particular, how some country's economic damage affects their high property prices will be crucial to observe. In sum, EM currencies, interest rates and equity markets should, therefore, remain highly divergent, with substantial volatility, fraying the nerves of many investors. One country to watch with interest will be Turkey. It benefits from lower oil prices, but is vulnerable to global (and domestic) capital flows, so if its markets weaken, it would be a signal of significant amounts of EM contagion.