Be sure to do your homework on individual economiesby Duncan Weldon / July 18, 2019 / Leave a comment
In 1981 World Bank economist Antoine Van Agtmael coined the term “emerging market” as a more appealing nomenclature for “less developed economies.” While the older terminology emphasised the gap between countries such as Brazil and China and their more “advanced” peers, the newer term shifted the focus to their potential to rapidly catch up. Investors were quick to catch on and the last four or so decades have been marked by cycles of emerging market investments moving in and out of favour. So what does the picture look like now?
What’s certain is that since the term entered economists’ lexicons, emerging markets have become a lot harder to ignore. According to the IMF, emerging economies represented around one third of global GDP in 1981. Their share of global output rose above 50 per cent in 2008 and is now around 60 per cent. In many cases the “advanced vs emerging” distinction looks increasingly arbitrary. “Emerging” South Korea now has a higher GDP per head than G7 Italy; while Italy’s public finances look wobbly, Russia has a fortress-like balance sheet and half a trillion dollars’ worth of foreign exchange reserves.
High-profile, but idiosyncratic, problems affecting Argentina and Turkey in 2018 were often taken to herald “a new crisis for emerging markets.” In many ways it makes no sense to group over half of the world’s GDP and a much larger share of its population under one label. That said, the countries usually described as “emerging” are often still buffeted and buoyed by similar global factors. In particular, the strength of the US dollar and the direction of US interest rates usually act as powerful headwind or tailwind.
When US rates are low or falling, money flows to where a better return is available and that usually includes emerging economies. Inflows boost asset valuations, increase liquidity and manifest in rising credit growth and markets. By contrast, when US rates are rising, those flows reverse. The result can be lower credit growth, falling asset valuations and plunging local currencies. All can translate into painful economic dislocation.
Which is the case currently? With the Federal Reserve now signalling that cuts to US rates are more likely than hikes and the European Central Bank also sounding more dovish, the global environment should not be too unfavourable to emerging…