The shortcoming of the term 'emerging markets' (EM) is that it suggests risky and impoverished count...
The shortcoming of the term 'emerging markets' (EM) is that it suggests risky and impoverished countries that are a long-term selective play on 'possible' economic development. But in recent years, the rapid economic emergence of most developing economies is significantly impacting the developed world.
Historically, unconvinced investors would increase exposure to these so-called high-risk, high-beta markets when global markets generally were accommodating higher levels of risk. While this trade-off between risk and 'greed' is still prevalent, a new trend has started in very recent years that investors have not yet appreciated: fear.
It has been 20 years since the last economic crises in emerging markets - developed markets have caused subsequent crises. The restructuring forced upon EM economies and companies at that time built a sound base for what was to come - global reflation and a massive shift in savings from developed to emerging economies.
Developed markets are feeling the consequences of EM growth, but the cause of this economic discomfort has not been appreciated. Oil, food and commodity prices will lead to a marked decrease in disposable income. This may appear cyclical, but it is a secular phenomenon for developed markets.
Developing markets have built up an unprecedented economic war chest to foster development. Through massive surpluses in fiscal, currency and trade balances, this arsenal will be deployed domestically and will drive growth. It is irreversible. The economic future of developed markets will matter less to emerging markets as this economic revolution unfolds.
In this context, the constant focus on the impact of developed markets on emerging markets is redundant. The EM phenomenon will impact developed markets via the consumption of resources that all economies require for economic development and growth. The former can afford to pay the higher prices given the differences in sovereign and corporate wealth.
The only defence against a significant decline in real wealth is to invest in emerging markets. The rationale for investing in EM has changed from one of greed to one of secular fear that exposure to EM in savings vehicles is not high enough.
- The consequences of emerging market growth are affecting developed markets
- Due to their massive surpluses, emerging economies can afford to pay higher prices for food and fuel
- Investing in emerging markets could help offset a secular decrease in developed market disposable incomes.
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