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Spring Investment Monitor - March 2014Emerging markets become the new concern
In our first ever Spring Investment Monitor, published this time last year, developed markets were the drag on the global environment, with the UK having recently been downgraded by Moody’s and the US struggling under the fiscal cliff, while emerging markets looked optimistic.
As we enter the back-end of the first half of the year, the US is clearly the biggest winner in economic growth terms, partly driven by the boom in shale gas exploration and extraction, while even the eurozone is perking up with annual inflation in January remaining stable at 0.8 per cent, according to the Organisation of Economic Co-operation and Development (OECD).
For some, however, the risk of Europe importing deflation remains a concern, highlighted by the fact average inflation in the eurozone, as measured by the harmonised index of consumer prices (HICP), was 1.3 per cent in 2013 compared with 2.5 per cent in 2012. Meanwhile monthly inflation has been recorded below 1 per cent in the region since October 2013, raising concerns deflation, and following in the footsteps of Japan, could be a consequence of monetary policy.
Japan, however, has been one of the best performing markets both in terms of investment markets and economically. Annual CPI inflation in the country dipped slightly in January to 1.4 per cent compared with 1.6 per cent in January, according to the OECD, but it remains on track to hit the target of 2 per cent that is part of ‘Abenomics’.
The potential hurdle for Japan remains the tricky ‘third arrow’ of structural reform, although a report from the OECD in February on ‘Going for Growth’ suggests that “adopting ambitious and comprehensive structural reform agendas will offer governments the best chance for a return to strong, sustainable and balanced economic growth”.
Speaking at the launch of the report, Angel Gurría, secretary-general of the OECD, noted: “Signs of a broad-based recovery are becoming more tangible, but governments of advanced and emerging economies now face the risk of falling into a low-growth trap.
“Progress on structural reforms can boost growth and living standards worldwide. Slowing growth and persistently high unemployment in many advanced economies cry out for reforms. The vulnerability of many emerging-market economies to the ongoing tightening of monetary policy and the cooling of the commodity boom serves as a reminder that the case for structural reforms is also strong there.”
Tapering of US quantitative easing has been one of the triggers attributed for the recent sell-off in emerging markets, particularly affecting those countries with large current account deficits and vulnerable conditions, such as the ‘Fragile Five’ of South Africa, Brazil, India, Indonesia and Turkey.
Macroeconomic factors are shown to have a minimal impact on performance, yet they do significantly affect investor confidence and sentiment. If the more vulnerable emerging market nations can weather the effect of tapering and start to show continued growth – albeit at lower levels than previously – this should help shore up sentiment.
The risk, as always, is if progress in the growing markets stumbles at the same time as emerging markets struggle. In a truly global, interconnected investment universe, decoupling is simply an interesting concept, not a practical theory.
