Emerging Asia is set to be the world’s fastest-growing region again in 2015, skirting the contagion from Russia’s crisis and riding the fall-out from weak commodity prices, according to Fitch, the credit rating agency. Nevertheless, structural frailties stalk seven out of 10 countries in the region, with surging debt levels a particular concern, the agency said.
The region, excluding China, is expected to expand by 5.9 per cent in 2015 and 6.1 per cent in 2016 – compared to an average for global emerging markets of 4.1 per cent and 4.5 per cent respectively, Fitch said in a report. These forecasts compare with the International Monetary Fund’s (IMF) estimates that developing economies would this year grow at 4.3 per cent, accelerating to 4.7 per cent in 2016. Read more
By John Calverley, Standard Chartered
Around the world, governments are jostling to be at the forefront of new technologies. Policies range from tax breaks, research grants, and science parks to subsidising innovative start-ups and favouring domestic firms when buying technology.
Some of this is undoubtedly helpful in driving technological development. However, adoption, not invention, is the main driver of economic growth in most countries. Read more
The year is barely under way and already Brazilian analysts are hurriedly revising down their projections for economic growth in 2015. In the central bank’s second weekly survey of market economists of the new year, published on Monday, gross domestic product is seen expanding by just 0.4 per cent, down from 0.5 per cent expected last week and about 0.7 per cent a month ago.
It is an inauspicious way to begin a year that not only will be hugely significant for Brazil but in which Brazil – or so Manoj Pradhan and Patryk Drozdik of Morgan Stanley argue in a note on Monday – will be hugely significant for the rest of EM. Read more
By Michael Drexler and José Ernesto Amorós Espinosa
Fernando Fischmann once had a dream of building a holiday resort around an artificial lagoon that many international experts considered “practically impossible”. Today, 15 years later, Fischmann holds the Guinness World Record for the largest swimming pool in the world (see photo below). His dream is a global business based on patented technology that has developed over 300 projects in 60 countries. Where is this lagoon? Dubai? Las Vegas? Shanghai? No – it is in a small coastal town near Santiago in Chile. Read more
A severe slump in Russia and ebbing momentum in China contributed to an overall subdued performance for manufacturers across emerging markets (EM) in December last year, according to a compilation of data published on Tuesday.
The overall purchasing managers’ index (PMI) reading for EM manufacturing edged down from 51 points to 50.9 points in December (see chart), according to a Capital Economics compilation of data collected by Markit, the research company. The number suggests that while EM manufacturing activity is still expanding, the pace of that expansion is slowing. Read more
By Siddharth Dahiya, Aberdeen Asset Management
It is fair to say that 2014 has been a turbulent year for markets. It has featured a slowdown in China, crashing commodity prices, concerns about rising interest rates, the withdrawal of quantitative easing in the US and a rate of global economic growth that shows few signs of a meaningful pick-up. And this list does not mention geopolitical issues from Russia’s annexation of Crimea to the perilous rise of Islamic State.
Not an auspicious time for emerging markets, one might think. And a quick glance at the performance of many emerging stock markets or emerging market (EM) currencies would readily confirm that. Nevertheless, emerging market corporate bonds have performed comparatively well. Read more
How to predict future growth in emerging markets (EM)? This is a million dollar question for investors and policymakers. Dozens of crystal-ball indices have sprung up but most of them are pretty poor when it comes to making predictions.
So the latest measure, assembled by a group at Boston’s MIT and dubbed ‘economic complexity’, is of interest. It looks beyond the traditional measure of ‘economic diversity’, which has proved useful to economists because countries that export a diverse range of products tend to be better equipped to ride the roller coaster of global demand than those that produce just a few.
The new measure devised by the MIT team also considers the rarity of exported products, judged by the number of other countries that also export them. Including this factor alongside diversity of exports, the measure predicts that countries that export a wider variety of goods that are in relatively scarce supply stand to outperform those countries that export a narrow repertoire of goods in competition with other entrenched producers. Read more
By Jorge Mariscal of UBS Wealth Management
Over the past 20 years, 700m people have been lifted out of poverty in developing economies. This new middle class should grow another 60 per cent by 2020, increasing total consumption from $8tn to $13.5tn a year.
As the income gap with developed world peers narrows and aspirational consumer values converge, the emerging market middle class will be able and willing to pay for better education, health, housing, and infrastructure. These ‘public’ industries represent the most dynamic areas of the developing world – the new emerging markets to watch in 2015 and beyond.
Mass transit in Asia is an excellent example. The number of Asians living in megacities with more than 10m residents will double by 2025, the UN predicts. Meanwhile, vehicle ownership is doubling every five years amid rising incomes, while sharply rising carbon emissions are reducing air quality. Read more
By Jan Dehn, Ashmore Group
As the Fed prepares to hike rates in 2015, the window of opportunity presented by hyper-easy monetary policies for developed economies to undertake deeper fundamental reforms is rapidly closing.
So far, hardly any progress has been made. President Obama’s tenure has not seen the country’s economic problems solved. US trend growth has halved since the 1960s, while the debt stock has doubled to more than 350 per cent of GDP (not counting the further 300 per cent of GDP in unfunded social care liabilities). Europe and Japan recently re-engaged in QE-type stimuli to defend their fundamentally challenged economies from the effects of higher US rates in the future. Read more
A story told in the Bank of England goes like this. Shortly after the fall of the Berlin Wall, a group of Russian central bankers with solid grounding in Marxist economics came to London for a training course at the BoE. They patiently absorbed the theoretical run-down of supply and demand curves and how prices were determined, and then asked “But who sets the price?” A world without a state official with a clipboard announcing the cost of everything was unthinkable. Eventually the exasperated BoE economists took them on a trip to Smithfield meat market in the City of London to see the magic in action.
After the Wall came down in 1989 – triggered by a single unguarded remark by an East German Politburo member in a press conference – the speed and size of changes in the economies of central and east European (CEE) and the former Soviet Union (FSU) were unprecedented since the Second World War. Twenty-five years later, with currency crises wracking Ukraine and Russia, and FSU economies like Belarus and Moldova struggling to emerge from the Soviet era, the dispersion of performance has been dramatic. Read more
“If you see ten troubles coming down the road, you can be sure that nine will run into the ditch before they reach you.”
For about two weeks in late October, it seemed as if these optimistic words from Calvin Coolidge, the former US president, might have encapsulated the mindset of emerging market (EM) investors.
But the late October rally in EM financial assets has now stalled. Investors are relinquishing hopes that market troubles may turn out to be mere phantoms and focusing again on the very real problems coming their way. Four of the most intractable are set out below. Read more
Two central banks surprised the world last week with unexpected hikes in interest rates in the face of panicky financial markets. Raising rates a startling 150 basis points, the Central Bank of Russia was reacting sharply to yet another week of runs on the rouble. (It fell further this week nonetheless.)
The other, the Central Bank of Brazil, increased the cost of borrowing by a more modest 25 basis points. It seemed to be attempting to re-establish its independence credentials after the previous weekend’s presidential elections and subsequent worries that economic policy would tend towards the populist and the inflationary.
Yet just as with the advanced economies’ central banks – the Bank of Japan ramping up quantitative easing just as the Fed withdraws – monetary policy has diverged rather than unified in the big emerging economies. Read more
By Mark Malloch Brown, former United Nations Deputy Secretary General.
The conventional wisdom behind the renegotiation of the Millennium Development Goals (MDGs) – eight targets for reducing poverty and its attendant woes that were agreed by all United Nations members in 2000 – is that there were not enough of them and that they were too simple. So a UN industry has developed to write a lot more of them.
As one of the original drafters, my view is the contrary. It is not the goals that need changing (although they can certainly be improved at the margins) but rather the vision of development that lies behind them that needs reworking. And indeed adding goals risks detracting from the successful single-issue global campaigns – such as child mortality,which has halved globally since 1990 – that developed around them. Read more
By Tomás Guerrero, ESADE Business School
During 2013, frontier markets’ performance was well above emerging markets. The reference index for emerging economies, the MSCI EM, ended 2013 falling by 2.6 per cent, while the benchmark for funds operating in frontier markets, the MSCI FM, gained 26.3 per cent. The BRICS’ stock markets experienced significant declines, with the exception of China, whereas frontier markets became the most profitable in the world.
In the cases of Bulgaria, UAE, Argentina and Kenya gains were above 50 per cent. Currently, this trend continues. So far this year, the MSCI FM has increased 18.5 per cent, while the MSCI EM has posted only a 5.1 per cent increase. Read more
The slowing Chinese economy and unwinding of US quantitative easing have squeezed emerging market bonds. However, Brett Diment at Aberdeen Asset Management sees an opportunity in local currency EM debt, as he explains to FT’s EM editor James Kynge.
By George Magnus
Serial disappointments in emerging country growth rates since 2011 has forced the International Monetary Fund (IMF) to cut its five-year-ahead forecasts for a group of 153 emerging and low-income developing countries on six occasions since late 2011 (see chart).
However, in its latest World Economic Outlook, the IMF again assumes that current disappointments will give way to restored equilibrium growth rates over the next five years. But what if there is no equilibrium and emerging market (EM) growth continues to disappoint? Read more
By Tim Ash, Standard Bank
It has been easy in recent weeks to get carried away with big emerging market (EM) currency movements. A range of them – including the Russian rouble, Turkish lira, Polish zloty, South African rand and Brazilian real – have hit their lowest point this year against the US dollar.
But this is mostly about the dollar’s recovery, the broader US recovery and assumptions that the US Federal Reserve is way ahead of the European Central Bank (ECB) in terms of policy normalisation. Indeed, the ECB seems still to be going the other way, loosening monetary policy; the euro also appears to be on a hiding to nothing.
So who will be the winners and losers from the dollar’s recent ascent?
By Michael Power, Investec Asset Management
“Are we nearly there yet?” Most of us have faced – and in our younger days probably asked – the same question. As with children on long car journeys, this question is also posed by investors who cannot wait for bear markets to be over.
Commodity investors – and recently this has expanded from the metals and coal complexes to include oils – are wondering aloud when their recent ordeal will all be over. The same can be said for investors in those commodity-rich countries, as they survey their currency-ravaged portfolios. And this phenomenon is not confined to emerging markets (EM) – investments in Australia, Canada and even Norway have suffered the same fate. Read more
And so the fall in emerging market currencies continues. Over the past month, the third episode of taper tantrum has pushed exchange rates down almost across the board against the dollar, bringing with it the now familiar round of hand-wringing about the vulnerability of emerging economies.
Once again, however, at least as far as currencies are concerned, the latest bout of weakness falls somewhat short of full taper tantrum catastrophe. The depreciation of emerging market exchange rates looks a lot like a subset of the sharp appreciation of the dollar, which has also shot higher against the yen and the euro, than it does a weakness of the entire asset class. Read more
The US dollar surged again on Wednesday against a basket of emerging market (EM) currencies, adding urgency to the question of which EM countries are most vulnerable to a receding “carry trade”, the multitrillion dollar flow that has swollen domestic debt markets since 2009.
A soaring dollar piles pressure onto EM carry trade investors, who typically borrow dollars at low interest rates in order to buy high yielding EM domestic debt. When the dollar surges, they suffer currency losses that offset their interest rate gains, prompting them to sell. Read more