Coping with the challenges in shift to emerging world
The aftermath of the crisis has accelerated a shift in the centre of economic gravity from industrialised countries to emerging markets.
This is the result of the double effect of a ‘hangover’ of indebtedness in the developed world plus the associated move away from growth in the developed world, supported by net borrowing, to deleveraging.
Notably, in the UK, the indebtedness of households has increased by almost 50 per cent since 2000. Overall, global economic growth is likely to be lower in this post-crisis world with a polarisation between the western and northern (developed) and eastern and southern (emerging) economies.
Last year was a case in point. The risk in emerging markets was linked to a relatively ‘normal’ economic cycle – alternating fears of ‘overheating’ and ‘hard landings’.
However, in developed economies they were centred on concerns about a potential economic ‘meltdown.’ Markets sold off aggressively last summer because these concerns coincided.
Exaggerated risks of a hard landing in China and complete collapse in the developed world created a negative feedback loop that led to a big ‘risk-off’ move and a sell-off in global markets.
We anticipate that emerging markets will continue to enjoy superior economic growth to the developed world. Indebtedness is generally much less onerous and demographics – younger populations – more supportive in emerging economies. But in many cases the model by which this growth will be achieved will need to be more domestically driven to be sustainable and less dependent on demand from the developed world.
In some markets this will necessitate higher investment. In others – China and Asia more generally – consumer spending will need to be boosted as a proportion of GDP. Continued urbanisation in economies like China and Indonesia will support this trend, as will rising real wages in a number of emerging economies, including China.
Corporate earnings are likely to end up being weaker than in the pre-crisis period, as firms are less able to command favourable prices in developed economies and global economic growth is proceeding along a weaker trajectory. However, they are still likely to be attractive relative to prospective returns from government bonds that are regarded as ‘safe havens’ by investors.
Developed-world companies focused on demand from emerging markets are likely to have more pricing power than those excessively dependent on demand in advanced economies.
In addition, we believe strongly that the exchange rates of emerging market currencies are likely to rise in real terms against all of the major developed world currencies in the longer run.