Finding returns in a slower world

The eurozone sovereign debt crisis and mid-year jitters over US economic growth caused investors to seek perceived safe havens rather than the supposed higher risks of emerging markets.

It is unsurprising, therefore, that the MSCI Emerging Markets index recorded a loss of 17.82 per cent in 2011, while the MSCI Bric (Brazil, Russia, India and China) index of the largest emerging markets produced a worse loss of 22.28 per cent, compared with the MSCI World’s lower loss of 4.84 per cent, according to FE Analytics.

For this year, however, there seems to be growing optimism about the region. The IMF latest regional economic outlook for Asia and Pacific noted that capital flows into emerging Asia, including key Bric countries China and India, have rebounded in 2012 following a sharp retrenchment in flows into equities from investment portfolios in late 2011. It explains: “From August 2011 onward, global risk aversion spiked in response to escalating turmoil in the euro area, and investors fled to safe havens globally. In emerging Asia, this caused a large withdrawal of foreign equity investments, plunges in regional stock markets, sharp currency depreciations, and a shortage of US dollar funding.

“With the decline in global market turbulence in 2012, capital inflows to emerging Asia have resumed, and equity and currency markets have regained some of the ground lost in late 2011.”

However, the IMF still predicts growth in emerging Asia as a whole to decline from 7.5 per cent in 2011 to less than 7 per cent in 2012 before recovering in 2013, mainly driven by the outlook for advanced Asian economies and China.

As one of the key emerging markets, concerns about investing in the region have been driven by the idea of whether China will have a soft or hard economic landing. Its prospects for growth are likely to be a major factor in investors’ confidence. The IMF notes: “Growth is expected to slow to 8.2 per cent in 2012 as the authorities’ efforts to engineer a soft landing and support more balanced growth take effect alongside the fall in external demand, before rebounding to 8.8 per cent in 2013. Given China’s greater role as a source of external demand for many regional economies, this is expected to have knock-on effects in the region.”

India also has a lowered growth outlook with real GDP in 2012 expected to be 6.9 per cent, down from 7.2 per cent in 2011, before improving to 7.3 per cent in 2013, according to the IMF’s latest World Economic Outlook. “In India, the lowered growth outlook in 2012 owes much to a slowdown of investment which partly reflects structural factors. In particular, apart from some financial reforms and measures to broaden the use of public-private partnerships, the implementation of reforms related to infrastructure is likely to proceed slowly.”