The Year of the Horse is anticipated to see us galloping towards recoupling, which is to say that emerging markets are indeed impacted by developments in mature economies. With this in mind, I expect to see gross domestic product growth differentials between advanced economies and Brazil, Russia, India and China (Bric) — which have been narrowing since 2007 — to reach all-time lows this year.
With this trend, the notion that emerging markets alone offer high-growth potential is now fading, which raises new questions for investors. In particular, if there is no longer a high-growth differential, what motivation would investors have to consider Bric countries in their investment decision-making process?
Chinese whispers
The answer lies in China. The government recognises that growth is slowing and has embarked on a strategy of becoming a more market-driven economy. While the scale of this challenge should not be underestimated, these reforms are key to sustaining rising income levels in China. I expect these efforts to span over the next decade, with important implications for the region as a whole.
A more market-oriented China, with new sources of demand and growth (for instance, in services) will help to offset the negative impact of the continued tapering of the US’ quantitative easing programme on Asia. In the shorter term, however, international investors are likely to keep repatriating their capital to home markets as domestic yields rise.
Nonetheless, while this will require risk-averse investors to take heed of certain assets, such as property in Hong Kong, other areas of investment in Greater China, including the gaming sector in Macau, have sufficiently strong stand-alone fundamentals to weather these influences.
Julius Baer anticipates that in the decade to come, China will adopt a free-floating and freely convertible currency, a significantly larger private sector and higher value-added services and industries, which, in turn, will finance much higher standards of living. With this path laid out for the economy at large, I envision that investors will continue to have access to opportunities in Greater China, thanks to these reforms unlocking previously untapped value.
Opportunities galore
The year will see its fair share of ups and downs as the global economy continues to rebalance and reposition itself. In the midst of this process, Julius Baer takes a strong stand on the prevailing currency framework for the Chinese yuan (CNY) to remain in place. This means that a stable and gently appreciating CNY is the most plausible outcome of these reforms and from an investment perspective, this presents a unique opportunity as investing in pure currency in China will be a lower risk option in relation to equities and fixed income.
— The writer is Emerging Market Economist at Bank Julius Baer
