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Emerging markets: opportunities and threats

30 November 2015, Wealtheon

The term ‘emerging markets’ was conceived in the 1980s by a Dutch economist working for the World Bank and still continues to be rather vaguely defined today. Indeed, ‘emerging markets’ describes a group of countries that are making major economic inroads into the lead enjoyed by developed countries, but whose income per capita remains low. However, it is hard to draw a definitive boundary between ‘emerging’ and ‘developed’ countries, as can be seen from the fact that the IMF calls a country such as Chile ‘emerging’, while Greece is ‘developed’, whereas both countries have economies of similar size. Greece has also been in recession for a number of years and is struggling with an almost unsustainable debt burden, while Chile is growing 4% year-on-year and has a national debt of just 12%.

Those countries counted under the general heading of ‘emerging’ have developed in very divergent ways since the beginning of the credit crisis. Nevertheless, their only common denominator is the fact that they are experiencing above-average economic growth. A brief analysis of the 4 largest emerging markets – China, India, Russia and Brazil – demonstrates why there is this divergence.

Over the past decade, China has seen superlative results in terms of economic growth. The 5-year plan drawn up in 2010 by the Chinese Communist Party was designed to see the country double its Gross National Product within 10 years, or average growth of 7% per year. Although China is still on track to achieve this, there are many indications that the country will have to settle for lower growth levels during the years ahead. The new 5-year plan (i.e. the 13rd one) recently discussed sets a growth target of “a minimum 6.5% per year”. This is still ambitious, as well as somewhat doubtful, given the cooling of the housing market and the very strong desire of the Chinese government to stimulate the domestic economy. The investments and reforms required for this to happen will further weigh on China’s debt, but in the longer term, the domestic consumption stimulation is the most important way of achieving sustained high growth. This is probably the reason why the new 5-year plan plans the abolition of the 1-child policy.

India is comparable to China in terms of growth: ± 6 to 7% per year. But where the rate of growth in China is declining, it is still on the increase in India. This is a logical consequence of the geographic composition of the Indian population and the country’s current stage of economic development. India’s population is relatively young and the number of people in the workforce is expected to grow by a further 20% in the decades ahead, whereas a fall of 10% is forecast in China. That India is in a different (i.e. earlier) phase of development can be seen, among other things, from the fact that the income per capita of the population is still only a quarter of what it is in China. Another example is that only 27% of the Indian population has an access to the Internet, because the country’s infrastructure still falls a long way short in this area. Nevertheless, it is generally accepted that within a few years, India will be the second-largest user of the Internet, with equivalent consequences for e-commerce in that country.

The political climate in India remains a major challenge. The elections in 2014 installed Narendra Modi as prime minister, resulting in an absolute majority for his party (the BJP), and thus rose the likelihood that the economic reforms needed by the country may finally have a chance of being put in place. Specifically, the main points involve improving the infrastructure and tackling the stubborn level of bureaucracy and red tape. Recent elections in one of India’s states delivered incidentally a painful defeat for the BJP, making it clear that Modi, despite his absolute majority in parliament, is still vulnerable – which means that the immediate future of the country is vulnerable, too.

Within the group of the 4 largest emerging countries and in addition to the two frontrunners, China and India, Russia and Brazil are currently lagging behind the other two.

Russia has in recent years become increasingly isolated from the West and the country has also been affected by far-reaching economic sanctions brought about by the aggressive foreign policy conducted by President Putin. In addition, the sharp fall in the price of oil is having major consequences for the country’s revenues. The result is that the Russian economy is currently in a deep recession. And the fact that Russia recently became involved in the conflict with IS will not make a positive contribution in this regard.

Brazil, finally, is also going through a recession this year, which continues to deepen. The economy is predicted to contract by -3% for the whole year. Structural problems such as bureaucracy and corruption, as well as the collapse of the commodities markets are all negative factors. A strict austerity policy is required to turn the tide, but this will also be at the expense of the country’s president, Dilma Rousseff.

So, as you can see, the term ‘Emerging Markets’ is relatively wide, although the differences between these countries are often significant. Investors will need to be aware of this when making their investment choices. But in a world of limited economic growth prospects, the emerging markets can still offer some gems capable of giving additional gloss to an investment portfolio.


Macroeconomics


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