The markets are once again busy with chatter about Emerging Market ( EM ) and the sound of CHOAS seems to be re-emerging and many in the market are starting to wonder, what’s next ? A number of analysts have gone on record suggesting in their daily market commentary that emerging markets could now be a danger to global financial stability. No doubt, these are strong statements so it begs the obvious question, are we looking at another financial crisis, this time coming from the emerging markets ? And I do wonder if the fundamentals of EM have changed so dramatically leading some commentators to believe that a crisis is somehow imminent as evident from the way markets have reacted last week? Well, unlike our friends in the financial world, we ( I am referring to our group ) like many others who operate on a daily basis in the real economy can see and feel that the global economy is shaping up nicely and the IMF’s latest revised up global growth projection of 3.7% for 2014 and it’s growth expectation of around 5.1% for emerging markets from an earlier 4.7% GDP growth rate guidance, more or less reflects the ground the reality of the day. So the obvious question, why this panic and uncertainty ?
Now one could rightly argue that the revised up guidance are just projections and the risks both known and unknown still remains. Also the recent volatility in the markets to a large extent has been driven by downward pressure on the Turkish LIRA as well as Argentine PESOS devaluation and the South African RAND, which is also come under a bit of pressure. And then there are obvious chatters around how good or bad China is doing and how will the leadership manage the US 4.8 trillion dollar worth ( estimated ) shadow banking system along with a relatively high local government debts, and then there are concerns about India as well as Brazil’s fundamentals. These are real and genuine concerns but having said that, I can’t help but wonder, how is all this a SURPRISE to anyone in the market ? For example most of us are aware of the ongoing political uncertainty in Turkey and based on our own common sense, we could safely conclude that if the political turmoil drags on then there will be consequences to the economy.
And also assuming the worst case scenario, one needs to ask and know, did the previous crises in Turkish and Argentine economy kill the overall emerging markets across the board ? the clear answer is NO, so in short it will be unwise to assume that Turkey will some how bring down the emerging markets of Asia, Africa or Latin America, the reality is a potential crisis in Turkey may be more damaging to developed European economies then China or India for that matter. Also it is important to emphasise that there is a crisis of leadership in Turkey today which is weighing down on the economy and a positive resolution could very easily change the overall dynamics of the economy. Now with regards to China, a US 9.4 trillion dollar economy growing at around 7.7% isn’t just going to fall off the cliff under the weight of its shadow banking system and the local government debt. Yes, there are real concerns about how the government may go about handling the whole situation but it will be unwise to assume that somehow the economy will implode bringing down the global economy. There are simply too many opinions on China both bearish and bullish but understanding the structure and behaviour of the overall Chinese economy is an extremely complex task and betting against the government’s ability to deliver on its set forth agenda never really works and this may be one of the reasons why foreign investors tend to struggle in China. And with regards to India, the Indian economy today is in a much better shape fundamentally than last year also the overall investors sentiment around India has improved significantly, the country’s real problem today is a lack of decisive leadership which will hopefully get resolved after the upcoming general election and also most CEOs representing both local and overseas companies are quite upbeat about India’s medium and long term growth prospect. The current government has also made a series of reform announcements aimed at opening up various parts of the economy to overseas investors.
So why then the market is projecting a risk of contagion and giving a sense that somehow an imminent crisis is brewing up in the Emerging market ? I must say, I do wonder if by holding an emerging market stock or bonds or taking up speculative positions in local currency an overseas investor is ever able to get the full picture and flavour of the overall economy ? And the answer is, most likely not because in reality most emerging markets are layered and quite different to each other and also it must be said that there is a reason why they come under the category of being classified as ” emerging markets ” but this is not to say that developed markets are somehow immune to crisis as evident from the financial crisis of 07/08.
In the big picture scenario understanding a market or an asset class isn’t just about reading opinions from various experts of the subject and one must not forget that even in good times people and companies do fail so yes some emerging markets may struggle but today the global economy is in a much better shape than it was few years ago and it is quite unlikely that from here on we are looking at an imminent collapse. However, the inherent risk in the global economic system as well as the financial markets by design still remains so the system isn’t CRISIS proof and never was. Also opinions and projections are part and parcel of how a markets operate but people do need to be rationale and honest because clearly there are those in the market who may prefer a free ride and to keep making money on the back of easy money printed by the central bankers. This is not to suggest that the global economy has now reached a stage when all the loose monetary policy stimulus should be withdrawn right away, the tapering and tightening of traditional monetary policy tools will most likely be gradual.
But having said that the market will continue to make tapering related bets. Vanguard, PIMCO and BLACKROCK lost roughly over 35% in value on their investment in the last 6 months of 2013 by getting their inflation bet wrong on Treasury Inflation Protection Securities (TIPS ). These firms made bets on the assumption that Quantitative easing (QE ) will deliver inflation down the road and although it is quite evident that they got their bet wrong but we mustn’t forget the fact that QE did in fact create Inflation in ASSET PRICING and also across various Emerging Markets, but obviously not where it was expected so clearly those who held a view that QE will create inflationary mayhem in the economy killing the dollar down road most likely didn’t incorporate the fact that the economy of today works and behaves a bit differently. There needs to be a realisation that too much money in the system and ultra lose monetary policy will not necessarily create an immediate spectacular growth trajectory especially when the economy is coming out of a MASSIVE HEART ATTACK. And there are clear evidence that QE has created ASSET pricing inflation through misallocation of capital and this may be what is eating up growth ( growth rate below market expectation ). Also while some managers did get their inflationary bet wrong they should also realise that central bank’s ability to create or control inflation in a 2014 world isn’t always guaranteed or straight forward but having said that inflation will slowly but surely show up in the real economy but most probably not tomorrow.
Investment is about taking risk by relying your own assessment of a specific risk and then taking a decision based on your own judgement. MARKETS OR COMPANIES are all run by Human ideas and thought process so the market or a company is only as good as people behind them. And without being philosophical, we all know that life comes with no guarantee so what do we do? well, we learn to take risks and the same goes for creating a business and how we invest. There are no guarantees and the guarantees you may have or seek could easily become worthless when the circumstances change. And whatever investment decision you make or take will always come with an inherent RISK so there is always a chance that it may or may not work out as planned. You can only make a decision based on what you can see and know today but there are always many unknowns that you may not be able to factor in and going forward these unknowns may very well influence the outcome.
So investing in general isn’t all about following a trend or analysts reports or getting overwhelmed by the sound bites coming from various corners of the market or committing yourself to a fancy model. In most cases, a good investment is generally about following your own intuition or in other words your own inner radar just like many decisions we make or take in our lives and you can always use the information available in the market to make up your own mind in a similar way as you would seek advice from friends or family when taking an important decision in your life but always remember you will have to live with outcome and blaming others for an undesired outcome never helps although it might be quite tempting to play the game but if you do then you are denying yourself an IMPORTANT OPPORTUNITY TO LEARN and there is nothing scary about learning. So the all scary emerging market as projected by some in the market today in fact may not be that scary after all and remember a perception doesn’t always equal reality.
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Developing countries’ share of global equity market capitalization jumped to a record 24 % in the first half of 09 from the past levels of 15% at the start of 07 as more investors flock attracted by the growth story.
Investors are now beginning to realize that developed nations are possibly faced with decades of very low growth and may need decades to work off the mountain of debt which is the biggest since World War II. According to IMF recent forecast the total debt of developed nations used to fund various bank bailouts and stimulus packages could reach above 113% of GDP by 2014. This is more then three times the estimated forecast of 34% for developing nations. Though one could argue that developed countries have had bigger debt burden in the past ( post World War II ) reaching close to 250% of GDP in case of U.K., and over 100% in case of USA but these debts were repaid pretty quickly. On the other hand, we have to take into account that developed nations recorded decades of high growth just after the World War II ended which allowed them to get their fiscal house in order. In the current circumstances it is highly unlikely that the developed economies will see growth levels of post World War II era going forward.
Developed countries are in a catch-22 situation if they spend more to keep stimulating the economy they risk running into a huge unsustainable fiscal deficit. The combination of low growth and ballooning budget deficit could be very damaging to developed economies. The talk of the town is now increasingly focused on getting the fiscal deficit under control. It looks like the Governments in the developed world have resigned to the fact that they are entering into a low growth era. World Bank is now forecasting the GDP of high-income countries to shrink by over 4.2% in 09 and the overall global economy to contract by 2.9% in 2009. In terms of regional growth the World Bank is forecasting the growth in the Middle East and North Africa to fall to 3.1 percent, while that of sub-Saharan Africa to drop to 1 percent from an annual average of 5.7% and the LATAM to fall to 2% however, East Asia should post a growth of above 5%. Although the report suggests that economic growth in emerging countries could slow to 1.2% in 09 China and India should achieve a growth of above 6% in 09. We must also add that one of most interesting growth area of the global economy could potentially be rural India with its 700 million plus population. Some companies have already started to focus on rural area of the Indian economy as they see a very bright growth prospect going forward. The recent Indian budget has rural India at the centre and it looks like the government of India is aiming to UNLOCK the growth potential of rural India which is most certainly a step in the right direction.
It is becoming more apparent that going forward the growth is going to come mainly from the developing world. The ongoing CRISIS will mostly probably be recorded by historians as the event that triggered a POWER shift. The developing countries are already asking for more influence, oversight and control over how the global economy is managed, supervised and operates. The industrialized world’s clout to impose its policies will only weaken from here on. G-7 countries are beginning to realize that their grip on global affairs is slowly waning and they will have to give away a lot of their influence and control over how the global economy is run but that said it will be unwise to assume that developing economies are ready to lead the world.
We are already seeing signs of what could possibly be a shifting world order. We saw Russia host the first BRIC summit albeit a symbolic one. China, the world’s 3rd largest economy seems to be promoting Yuan as a serious alternative to dollar and it looks like they have a Grand plan for Yuan’s role as a global reserve currency going forward. This is evident from People’s bank of China recent unveiling of rules on Yuan-settlement facility. The rules will apply to companies involved in trade with Hong Kong, Indonesia and Macau. As a trial the central bank is going to allow companies in Shanghai and four cities in the Guangdong province to settle their trades in Yuan with companies in Hong Kong, Macau and Southeast Asia. In a separate announcement on July 6 Bank of China signed clearing agreements for Yuan settlement in Shanghai with over 11 overseas banks, including Standard Chartered, Bank of East Asia and Bank Mandiri of Indonesia. As one of the major trading countries it makes complete sense for China to start reducing its reliance on dollar. Despite of the fact that the stage is being set to promote a real alternative to dollar by major developing economies including China, Russia, Brazil and now India one has to admit that in the short to medium term it is hard to envision dollar loosing its status as a global reserve currency.
However, more and more investors are getting attracted to the emerging market story and who would blame them. We saw the MSCI Emerging Markets Index rise by over 35 % in June 09, beating a mere 2.9 % rise in the MSCI Index of developed economies and increasing the value of stocks to $8.6 trillion from $5.1 trillion in 2008. We also saw the market capitalization of Brazilian equities reach close to US 950 billion while that of Indian equities reaching close to US one trillion and Chinese equities surpass the US 3 trillion dollar mark in June. It is becoming more and more evident that developing economies are now moving closer to the centre stage and it looks like the investors have formed an opinion that emerging market is where the PARTY is going to be and this probably explains why the Investors have poured in close to US 26 billion into emerging market equities in the 2nd quarter of 09.
Although one understands the euphoria but we should not forget the fact that we live in a very interlinked world and any country on a stand alone basis is not capable of growing in isolation forever. It has to be said that not all emerging countries will fair well, Latvia is a prime example, but emerging markets have mostly certainly come of age and going forward without much hesitation one can safely conclude that they are going to be the next generation of growth providers.Read Full Post | Make a Comment ( 1 so far )