Richard Wallis is head of research and investment at Origen
When looking at global emerging markets, it is firstly important to understand what is meant by an emerging market. A popular definition is that an emerging, or developing, market economy is defined as an economy with low-to-middle per capita income. While this definition can be widely interpreted, countries whose economies fall into this category are usually considered emerging because of their developments and reforms. This can lead to a variety of countries being included from China, which could now be considered as an economic powerhouse, to the much smaller economies of a former Eastern bloc country.
In recent years, new terms have emerged to describe the largest of these developing countries with one of the more popular ones being BRIC, which stands for Brazil, Russia, India and China. Although these countries do not share any common agenda and are not a political alliance, they certainly have the potential to form a powerful economic bloc in the future as by 2050, they are expected to be wealthier than many of the current major economic powers.
The strong returns between 2005 and 2007 came as many investors at this time believed in the theory of 'decoupling', which was where emerging economies and markets, notably in Asia, could shrug off a downturn in the industrialised world and continue to grow irrespective of conditions elsewhere. However, this theory disappeared quickly last year as global growth fell and recession was felt across the major developed economies while there was also a sharp decline in global equity markets. While some global emerging markets did not fall into recession, they still suffered a sharp decline in GDP growth, eg China, and this led to significant underperformance by most emerging economies indices.
Although the decline in emerging markets was much sharper than that for developed economies, these markets also reached their bottom much earlier as they found this level in October 2008 compared to March this year for the major economic powers. Since the bottom was reached, there has been a reversal in fortunes as investors again bet on the decoupling theory and this has resulted in a strong rebound in emerging market indices with, for example, the FTSE Emerging Markets index gaining by over 65% from its low to the end of May this year.
While the recovery in emerging markets has been undoubtedly impressive, it should be noted that basis of the hope is not without risk. Looking predominately at the main emerging economies, namely the BRIC countries, it is likely that GDP in both Brazil and Russia will still contract this year while it is not clear that either China or India will enjoy a 'V' shaped recovery. Furthermore, the Asian economies remain export-driven and as such, demand for their goods remains underpinned by the developed countries with the US consumer of particular importance. Consequently, export-led economies such as China may not receive the help they need from consumers in the developed world as the decline in house prices and rising unemployment are likely to lead to continued subdued spending in the short-term at least.
Notwithstanding the above points, there are still a number of strong positive arguments for investment in emerging markets. Government stimulus particularly in Asian markets has ensured a sharp rebound in loan growth and has helped stimulate investment and manufacturing, which is growing again. In addition, Asian foreign reserves are broadly higher and external debts generally lower than in the West, plus the region's banks tend to still be well capitalised.
In conclusion, although there has historically been talk of decoupling, particularly from the US market, 2008 demonstrated that this has not yet been achieved although it is likely that the dominance of the US will reduce in years to come as other economies grow at faster rates. Although there has been a sharp rebound in emerging markets so far in 2009, the outlook for the rest of this year is likely to remain challenging and susceptible to any new downturn in the developed world.
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