By Dorthe Fredsgaard Nielsen, GAM
This year began with a rather pessimistic macroeconomic backdrop for emerging market (EM) countries, influenced mainly by deflating of the global commodity bubble, China’s seemingly endless malaise and growing geopolitical risks.
From a micro-economic perspective, the picture was just as bleak. Since the end of the financial crisis, EM corporates had been increasing their debt loads to fund future growth in anticipation of continued strong pricing power and high growth rates. However, both pricing power and profitability were lower than expected, leaving many companies, particularly in the mining and energy sectors, highly leveraged.
This is now stabilising. Balance sheets of EM corporates look much healthier than those of their US counterparts and the strength differential is likely to increase further as US companies continue to add to their debt (figure 1). Read more
Matthew Blake, World Economic Forum and Gloria M. Grandolini, World Bank
Maria owns a tiendita, a small local shop on a side of the road in Medellin, Colombia, where she sells various items, including local soft drinks. But some potential customers are unable to buy anything at this tiendita — Maria’s shop is a cash-only operation. This scenario is not unique to this store: it demonstrates the omnipresent role cash has across the globe.
We estimate that in 2015, global cash and cheque payments among micro, small, and medium-sized retailers (MSMRs) stood at $19tn, compared to total payments to MSMRs – including those from various types of card – of $34tn. The majority of these cash transactions happen in emerging markets.
This first estimate of the size of the cash-based economy reveals the prevalence of cash in the global economy and suggests the size of the opportunity for electronic payments, which include swiping a card or tapping a smartphone. To put $19tn into context, it is larger than the GDP of the United States. Read more
By James McCormack, Fitch
The strength of the US dollar is the single most important issue of the many facing emerging market (EM) economies. At the same time – and in some cases as a corollary of the dollar’s strength – they are struggling with lower commodity prices, increasing rates of inflation, heightened political and geopolitical risks, greater financial market volatility, large capital outflows and an extended period of weakness in global trade.
It is critical to consider nominal dollar incomes in assessing countries’ relative economic performance and prospects because the dollar continues to dominate the pricing of global commodities, the settlement of international trade, the extension of cross-border credit and the foreign reserve assets held by EM central banks. Although the international roles of several other currencies, including the Chinese renminbi, are expanding, there is no convincing evidence that the dollar’s supremacy is under any immediate threat. Read more
By Richard Samans, World Economic Forum
“Are emerging markets already mired in a ‘crisis’,” the FT asked this week. The word is starting to surface, it noted. Economic growth slowed, global demand slumped, and trade plateaued, in recent months and years.
But leading emerging markets (EMs) such as China, Brazil and South Africa can still avert a real crisis. To do so, they would do best to broaden their attention beyond traditional measures of GDP growth to specific drivers of social expectations. They may find a more diversified strategy for growth itself along the way.
While news reports recently zoom in on the currency, debt, and stock markets woes in emerging markets, EM governments may worry about popular discontent at home more. From the BRICS over to Chile and Turkey to Indonesia, governments as of late are grappling with demands for wider social inclusion. Read more
By David Lubin, Citi
You often hear economists and investors talk these days about the ‘broken growth model’ in emerging markets. It isn’t a terribly precise term but it’s easy to see what people mean. The problem in EM is that none of the three possible sources of GDP growth – exports, or public domestic spending, or private domestic spending – have much going for them.
Exports from EM are hobbled by a collapse in the growth of global trade and the related fall in world commodity prices. Public spending growth is weak because many governments are too nervous to loosen fiscal policy, fearing a loss of sovereign creditworthiness at a time when the outlook for capital inflows isn’t encouraging. And private domestic spending is hampered by the fact that credit markets in many countries are in ‘post-boom’ mode: neither domestic lenders nor borrowers have much in the way of risk appetite. Read more
By Asha Mehta, Acadian Asset Management LLC
There is no doubt that frontier equity markets are appealing as a concept. They are seen as future growth engines in the world economy, available at an entry point that may be similar to the opportunity offered by emerging markets twenty years ago.
A $100 sum invested in a broad emerging markets index in 2001 would be worth about $285 today, versus $154 for the same amount invested in developed global markets*.
So, why are investors generally not investing in frontier markets, which may offer a similar upside? Here are five probable reasons why, along with a reasoned assessment of each. Read more
Emerging market (EM) official foreign exchange (FX) reserves have been falling steadily by an average of $58bn a month since reaching an all-time high of $8.17tn in June 2014. This has mainly been due to reductions in China and Russia, but is accentuated by declines elsewhere. Total reserves have also been falling year on year from December 2014, with the cumulative yearly decline accelerating to $385bn in March 2015 (see chart below).
Typically, reserve reductions indicate balance-of-payments pressures and/or central bank interventions in currency markets to dampen exchange rate depreciations. Greater exchange-rate flexibility across EMs and previous reserve accumulations alleviate most immediate concerns, including in China and Russia, but much depends on the direction of commodity prices and global market reactions to the eventual increase in US policy rates. Read more
In recent weeks, investors have been reminded how supposed risk-free assets, like Treasuries and bunds, can still inflict substantial losses. So far in the second quarter of this year, 10-year yields have risen by nearly 0.48 per cent in Germany and by 0.31 per cent in the US.
As a result, the JPMorgan GBI Global bond index is down 2.72 per cent in the year to date. With bond yields expected to drift higher as global growth and inflation pick up, this will continue to be the case. Puchasing bonds with wafer-thin yields means there is no cushion for capital losses.
Even locking in current bund yields of around 0.70 per cent, an investor would make a zero annual return if yields inch up by just another 0.07 per cent. A rise in yields of 0.25 per cent would be enough to erase dollar returns of ten-year Treasuries yielding 2.23 per cent today. Read more
Even Western executives who are good at geography may have a hard time picking out Surat, Foshan and Porto Alegre on a map. Yet over the next decade, each of these cities will contribute more to global economic growth than Madrid, Milan or Zurich.
While China’s move to cut interest rates this month has sparked some concern about emerging-market growth, , we see no let-up in one of the most disruptive trends of our time: the shift of the world’s center of economic gravity from advanced economies to the developing world, and in particular, to rapidly growing cities in Asia, Latin American and Africa. Even at 6 to 7 per cent growth, China is adding the equivalent of a Canada to the global economy every two years.
We are currently living through the biggest mass migration from countryside to cities in human history. The global population of cities is growing by 65m people annually – that’s the equivalent of 7 Chicagos a year, every year. Between now and 2025, we calculate that 440 cities in developing countries will generate nearly half of global GDP growth. Read more
Geo-economics was defined by its intellectual godfather, Edward Luttwak, as a contest defined by the grammar of commerce but the logic of war. Today, one of the most pernicious tools in this global contest is the evolving role of government in a market economy. It was one thing to fight the battle of communism v. capitalism. It is quite another to fail to recognize today’s competition is increasingly over the rules, norms and tools of state involvement in capitalism itself.
For decades, the US led global economic order largely advocated the position that the economic role of government should be limited. Ideally, governments should set the ground rules for investment and commerce via just laws and regulations and enforce them fairly both domestically and internationally. Beyond that, let the free market rule. Read more
“Buy when there’s blood in the streets,” Baron Rothschild once famously said. Applying that wisdom to emerging markets, Gavin Serkin names Nigeria as the most promising emerging market for the next decade. Is he right?
Looking for “the best place in the world to put your money”, Serkin, Emerging Markets editor-at-large at Bloomberg, traveled to 10 preselected emerging markets. Armed with ‘excel spread sheets’ and taking along emerging markets investors such as Mark Mobius, he visited Kenya, Myanmar, Romania, Argentina, Vietnam, Nigeria, Egypt, Saudi Arabia, Sri Lanka, and Ghana. The results of that emerging market Odyssey are in his book “Frontier”. Its conclusion is surprising: the world’s most promising emerging market is also one of the most violent. Read more
One of the few African proverbs that appears to exist other than in the minds of journalists searching for an intro is: “When the elephants fight, the grass suffers”.
Recently, the gyrations in the mastodonic major currencies have placed pressure on the EM countries maintaining pegs or ceilings or otherwise actively managing their easily-trampled exchange rates.
For those targeting the euro, the fall in the single currency after the European Central Bank embarked on QE has increased the challenge in holding their exchange rates down. For economies with dollar pegs, the question is rather whether they can stand the overall loss of competitiveness entailed in following the US currency upwards. For the moment, though, it seems unlikely that a large number of pegs will come undone or ceilings be destroyed. Read more
Russia’s economy is heading for a deep recession this year. Brazil is stagnating and China’s dynamism is dissipating, helping to depress the prices of commodities that many developing countries produce. But in spite of such afflictions, analysts caution against thinking that a multi-year consumer bonanza in emerging markets (EM) is running out of steam.
The “biggest growth opportunity in the history of capitalism”, as McKinsey called EM consumer spending in a 2012 report, may suffer setbacks in some key markets this year, but overall the narrative is set to flourish as disinflation triggers interest rate cuts and low oil prices put more money into EM consumers’ pockets, analysts said. Read more
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