Emerging markets may be cure
Debt in West is likely to be drag on growth, writes Sheldon Slabbert
Since the onset of the Global Financial Crisis (GFC) a decade ago, we have experienced the greatest expansion of credit in economic history, with more than US$14 trillion ($19.3t) of liquidity injected by the major central banks.
While the flood of money printing has delivered some outsized gains in individual stocks and certain sectors like technology, the broader economies have lagged, resulting in global economic growth being rather anaemic.
A further concern is that since the GFC, investors have been seeking safety.
That in itself is not a problem, but the sheer size of these flows into safe haven regions, assets and strategies in developed economies has skewed the risk profile of many of these traditional safe havens; in turn, creating concentration risk among investors.
As we near the end of the efficacy of central banks and the greater debt cycle, investors are left wondering, where to from here?
Frontier and emerging markets may well hold the cure to the global growth problem. Certain big name investors, like Jim Rodgers, have long been highlighting the prospects of these regions as investment destinations. Early investors refer to the ‘3Ds’ when comparing the investment prospects of frontier and emerging markets with that of developed economies. Namely, divergence, demographics and debt.
Firstly, divergence refers to divergence created by phenomena like the Industrial Revolution, which delivered greater benefits to regions that were already more advanced, such as Europe and the US.
That benefit was then carried forward to income and technology, which widened the gap between economic regions.
As this divergence begins to close, the International Monetary Fund has forecast that from 2015 to 2020, the poorest countries will grow the fastest, meaning they could continue to outperform over the long-term too.
An example of the changing landscape and narrowing of this divergence can be seen in the pressures felt by bluecollar workers in the US and Europe, including increased competition from the labour force in emerging markets.
This has also influenced the political landscape and is often viewed as an underlying factor in the emergence of Donald Trump, the Brexit vote and conflicts in Europe.
The negative demographics in many developed countries is also a concern, especially in regards to the size of the available workforce and deflationary effects on the economy. For example, China, India and Africa have the largest growing populations in the world. While China has to overcome some demographic issues in the near future, India and Africa have a positive demographic outlook. Africa is expected to overtake India and China as the largest population within 15 years.
The low levels of debt in many frontier and emerging markets compared to developed economies also suggests considerable room for future economic growth, as their middle class grows and more are lifted above the poverty line.
The debt saturation in the West is likely to be a drag on growth and see developed markets underperform.
The performance of commodity markets and that of emerging markets go hand in hand. We have seen commodity markets under pressure since many topped in 2011 and the subsequent selloff in most emerging markets.
However, many commodities have been recovering over the last 18 months, and we have even seen emerging markets outperform developed markets this year.
The iShares MSCI Emerging Markets ETF (EEM) is up 27.59 per cent for the year to date, while the US S&P 500 is up about 11.89 per cent.
Locally, the recovery in commodities driven by overseas demand for our produce has delivered good performances from companies like A2 Milk, Comvita, NZ King Salmon and Sanford.
Fonterra farmgate milk prices have also recovered from their 2015 lows.
The changing economic landscape holds many opportunities for traders, investors and business owners. The story behind frontier and emerging markets are compelling and the hard data is starting to support the beliefs of early investors like Jim Rodgers and Lawrence Speidell. Perhaps, we may soon hear of more local companies enjoying breakaway success.