Emerging Markets to Dent Global Growth --- Moody's

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Since hitting a low earlier this year, emerging markets have been on a tear, helped by economic stimulus in China, reduced fears over increases in U.S. interest rates and higher commodity prices.

The MSCI Emerging Markets index is up 16% since its nadir in January. But according to a report by Moody's, the optimism could be short lived.

Associate Managing Director Elena Duggar said global financial markets are vulnerable to "shocks" from the emerging markets where growth is slowing.

"The global recovery has weakened further and the outlook across countries remains uneven and largely weaker than in the previous two decades. Global trade remains subdued, while spillovers from emerging markets shocks to financial markets globally have increased substantially," she said in a statement.

Ms. Duggar said that while volatility in the markets has subsided recently, the risks that caused that volatility remain "under the surface."

Downside risks to China's growth outlook will persist, she said, particularly if policy support becomes less effective. Moody's forecasts that China's GDP will slow to 6.3% this year from 6.9% in 2015.

Uncertainty over the path of Federal Reserve policy is also a source of concern. The rating agency predicts two more rate hikes "at most" in 2016. But that could have an impact on emerging market economies such as China, Turkey, Brazil and Russia, which have all seen a rapid increase in corporate debt, some of which is denominated in U.S. dollars.

Rising U.S. interest rates could send the dollar higher against local currencies, making that debt more expensive to service.

Growth in emerging markets will slide to 4.2% this year from 4.4% in 2015, Moody's predicts, while growth in G20 advanced markets will ease to 1.7% from 1.9% in 2015. The U.S., U.K., Canada, Italy and Japan are all forecast to slow down.

Still, there is one bright spot. Moody's predicts that Europe's recovery will remain "on track."

It forecasts that GDP growth will rise slightly to 1.7% this year from 1.5% in 2015, helped by low oil prices, improving labor markets and accommodative monetary policy.

Moody's noted, however, that geopolitical issues threaten to undermine confidence, with 'Brexit' the most immediate concern. The possibility of Britain leaving the European Union after a June referendum could have a "significant impact" on financial markets leading to "prolonged uncertainty until alternative agreements emerge."