Emerging markets have been the place to be as the developed world teeters. This trend will continue.
One question being mulled over by members of the NeuGroup’s Treasurers’ Group of Thirty (T30) peer group is whether emerging market growth going forward will be enough to offset the lack of growth in developed markets. According to meeting material from he T30’s fall gathering and a Citi forecast, the answer is yes, for the most part. Here’s why.
Emerging markets story is not universal.
China is the chief protagonist in the story about emerging markets exceeding developed world growth, followed by most of East Asia, Brazil, Chile, Mexico and some Gulf states. Central and eastern Europe (tied more closely with the eurozone) will be much more questionable, which highlights how the lack of growth in the developed markets drags down the growth of emerging economies. It also highlights how emerging markets dependent on European banks from credit and liquidity will be hit hardest as they de-lever.
Protectionism and currency appreciation will offset some of the positives.
It was noted at a fall T30 peer group meeting that increasing protectionism in response to developed market backlashes and currency appreciation, along with the loss of exports to sluggish developed markets that also can be turning protectionist, will help to curb emerging market growth relative to recent years.
Developed world GDP gap a big one. The aggregate GDP of the developed world is 10-12 percent below its trend line from 1980. This will help the share of global GDP represented by emerging markets continue to rise (above 50 percent), but the rise is not likely to be enough to make up for the loss of growth relative to trends in the developed world.
So what’s next? Everything that is contributing to the developed market downturn—including poor investment-to-GDP ratios and government debt-to-GDP ratios—looks better in emerging markets. Many emerging market countries, topped by China, also have much more substantial FX reserves to weather global economic turmoil than ever before. These indicators suggest that the healthy emerging markets will still be the place to be for the near- to medium term—even if they will not make up for the loss of growth for the world as a whole. We still need to see some of the missing economic growth restored in developed markets. Whether emerging economies are strong enough (and safe enough) to survive a dismantling of the eurozone also remains to be seen.