Much has been written about the 2011 economic slowdown in global emerging markets (GEM). Given the subsequent stabilization of growth at a lower rate than before, there are some who believe the slowdown is more structural than cyclical. We are not in that camp. We believe the structural advantages for GEM are still intact.
It is important to remember that approximately 70% of the world’s incremental global growth is coming from emerging markets —even with the big markets of China and Brazil slowing down materially. We don’t expect a return to the high growth rates of last decade, particularly in China, but we would argue that this will perhaps be a higher quality more sustainable type of growth moving forward, led by the rise of a powerful middle class and perhaps less fixed asset investment.
In Asia, economic growth has entered a transformational phase where the strong export-led model will continue to adjust to a model based on domestic demand. We have argued that this may produce lower growth but less volatile growth. However, this is a long-term trend and for 2013, Asian economic growth will depend on exports. Consequently, our assumed second half recovery in the U.S. and the renewed interest in risk assets due to the reduction of tail risks thanks to aggressive central bank policies will be important for the Asian economies and markets.
Major competitive advantages remain in place:
- The cost advantage in manufacturing, that initially took developed companies overseas is still in place, but now perhaps sits in different countries and certainly in different industries.
- The corporate balance sheets which allow companies in emerging markets to take on this capacity are still very strong — they have continued to de-lever, having learned many of the painful lessons of carrying too much debt. This is also true at the government level and for households.
- GEM demographics should also not be ignored; they are a very powerful driver of economic growth and markets over time. Overall demographics in emerging markets are much healthier than the developed world, which will continue to act as tailwind over time.
Keep in mind that there are stark differences between GEM countries, so it is important to look beyond the major markets we have become accustomed to discussing. In the current environment, one may need to dig a little deeper and work a little harder to find great investment opportunities in the GEM equity markets — but they are there.