Fickle investors have spurned emerging markets in recent weeks, but this rout has obscured a more alluring vista out on the horizon.
Developing economies now account for 50 per cent of global output and 80 per cent of economic expansion and are projected to continue growing far faster than developed nations. They are expected to possess an even larger share of global growth, wealth and investment opportunities in years to come.
So much so that the labels investors use to classify some of these nations will change as the developing develop and the emerging emerge into more potent economic powers.
But this long-term view has been lost on many of those who look to emerging market assets for a higher yield in the short term. Their ardour cooled when the Federal Reserve signalled it may soon ease the stimulus that has kept credit cheap, signalling higher interest rates ahead. That was coupled with signs of slower growth in key emerging markets like China and Brazil.
Still, the developing world’s GDP growth of 5 per cent this year and 5.4 per cent next, as projected by the IMF, will far outpace the advanced economies’ 1.2 per cent and 2.1 per cent. Developing countries are now also better armed to keep panic at bay, with more foreign exchange reserves than before and less aggregate debt than developed nations. Many have put their economies on firmer foundations.
Fear of a mass exodus of investors, however, has still sent emerging market shares down about 10 per cent in the past two months, as measured by the MSCI Emerging Markets Index, compared with a marginal rise in the Standard & Poor’s index of US shares.
Consider some other data that the World Bank has crunched, suggesting developing nations will attract increased capital flows because their growth implies big investment opportunities, improved creditworthiness and the ability to better diversify portfolios and manage risk.
According to one bank report, by 2030 developing countries will represent two-thirds of all global investment, up from about half today and from one-fifth in 2000. At that time, half the global stock of capital is expected to reside in the developing world, compared to less than one-third today. That means a shift in the distribution of wealth and in the creation of opportunity.
This shift in investment activity coincides with the catch-up growth that began during the 1990s, as developing nations integrated into global markets, transformed their economies and improved their institutions.
“Productivity catch-up, increasing integration into global markets, sound macroeconomic policies and improved education and health are helping speed growth and create massive investment opportunities, which, in turn are spurring a shift in global economic weight to developing countries,” the report said. And to be clear, this is investment in buildings and machinery, not the more flighty financial flows.
The BRIC nations are expected to loom large. China will make up 30 per cent of all investment activity, while Brazil, India and Russia together will account for more than 13 per cent of global investment in 2030 — edging the 11 per cent projected in the US.
But their growing importance as sources and destinations of capital flows will not be a BRICs story alone, the report says. It calls out Sub-Saharan Africa, for example, which can be expected to not only receive a growing volume of capital flows but also to attract an increasing share of the total capital flows to developing countries.
The bank’s researchers forecast that developing countries will likely have the resources needed to finance massive future investments for infrastructure and services. That’s predicated on strong saving rates, expected to top out at 34 per cent of national income in 2014 and averaging 32 per cent annually until 2030. Meanwhile, the saving rate for high-income countries will fall from 20 per cent to 16 per cent.
In aggregate terms, the developing world will account for 62-64 per cent of global saving of $25-27 trillion by 2030, up from 45 per cent in 2010.
This points to greater wealth in the developing world as a percentage of the global total: the average per capital income of the developing world is expected to rise from about 8 per cent of that in high-income countries in 2010, to about 16 per cent by 2030.
The average citizen of what is now a developing country, according to one bank scenario, will earn 19 percent of the income of an average high-income country citizen by 2030.
Indeed, one McKinsey study projects more than half the world’s population will have joined the consuming classes by 2025, boosting consumption in emerging markets to $30 trillion a year. It will, the report says, be nothing short of the “defining growth opportunity of our times.”
Seizing on this theme, Bhaskar Chakravorti and Gita Rao, writing in Foreign Affairs recently, pointed to the hand-wringing over the decline of American power and urged US businesses to compete in emerging markets to help themselves grow, hire again and create wealth.
Another fan with a long lens is Mark Mobius, chairman of the Templeton Emerging Markets Group, who wrote that commodities, exports and infrastructure development could continue to be leading growth drivers in many emerging economies, but overall growth is likely to arise increasingly from healthier domestic demand.
These forecasts are not unconditional. Some risks will reduce over time. Others will increase.
The countries must continue to drive increases in productivity and attract investors to finance the investments, the bank’s report says.
There is also an assumption that some of markets will have addressed some of the hurdles to invest now — which variously include poor governance, lax enforcement of contracts and property rights, corruption, lack of adequate infrastructure and distribution networks and uneven pipeline of talent.
In addition, as emerging economies develop, their financial markets integrate more into global ones, and they ease restrictions on capital that flows across their borders, then it becomes more difficult to shield them from international shocks, the World Bank said. They can mitigate those shocks as alternatives to the dollar rise and they build reserves in other currencies like the euro and the yuan.
There are other challenges that concern Neil Shearing, chief emerging markets economist at Capital Economics in London. The first, already well-known in China, is the need to reposition economies to be more consumer-driven and less dependent on exports. The second is avoiding the kind of investment bubble created in the eastern European property market — which burst a few years ago.
“If the investment is in glitzy shopping malls,” Shearing told me, “it can create bubbles and be dangerous. Whereas investment in China is excessive but in roads, railways and ports that you do want to look for.”
Growth may slow, and challenges will abound, but the prospects loom large. And therein lies opportunity.
CREDIT: Reuters
