EMs: Still More Good News than Bad
John P. Calamos, Sr.
August 12, 2013
The good news is that we are in a global market that provides opportunities around the world. The bad news is that we are in a global market, so whatever happens anywhere affects us all.
Today, the Wall Street Journal pronounced on the front page, “Emerging World Loses Growth Lead,” citing declines in global trade and improved conditions in the developed economies. The WSJ cited data from Bridgewater Associates L.P. that “for the first time since mid-2007, the advanced economies, including Japan, the U.S. and Europe, together are contributing more to growth than the emerging nations.” And in July, the IMF announced revisions to its growth estimate for emerging and developing economies to a “more moderate pace” of 5% in 2013 and 5.4% in 2014, with China’s GDP growth estimated downward to 7.8% for 2013-2014.
Less robust growth in the emerging markets (EMs) isn’t welcomed, especially when we don’t know where the bottom will be, but investors shouldn’t get ahead of themselves. Expansion levels remain entirely respectable, both in absolute and relative terms. After all, the U.S. is staging a recovery with a growth level well under half of that of the IMF’s estimates for the EMs. Most of us are quite happy about it. Even the WSJ notes, far further down in its article, “The latest rebalancing of global growth is nascent and could reverse, should emerging economies bounce back even a little.”
As EMs mature and expand, it’s to be expected that growth rates would decelerate from torrid levels. It should also come as no surprise that their economic expansion is not proceeding along a straight-line upward trajectory. That’s not how economies work. And we should be happy that the developed markets are regaining their footing—to my way of thinking, that’s good for the global economy as a whole.
EMs: Still Doing Their Fair Share for Global Growth
If 5% growth in the EMs cause for extreme consternation, that points to a bigger problem. When global economy needs the EMs to deliver rapid growth, year over year to stay afloat, that’s bad news for the global economy. EMs can’t be expected to go it alone, dragging the developed markets forward indefinitely. Developed markets must do their share, striking the right balance between capitalizing on EM opportunities without becoming overly dependent on them, whether that’s for loans or export markets.
Although GDP is decelerating, EMs still look well positioned to be an important driver of economic growth, thanks in large measure to the rise of a middle class. Of course, consumers do adjust their spending habits in tougher economic times, but the exponential prosperity of the EM consumer class provides sustainable opportunities for companies worldwide, even if GDP growth dips to more modest levels—assuming that growth is sustainable.
Moreover, many of the EMs have healthy debt-to-GDP levels and as the EM consumer class grows, we would expect to see an increasing focus on services within EM economies. Over time, this diversification should help smooth some of the bumps in the road that have resulted from having economies dominated by manufacturing and commodities. And although conditions are different in every country, there have been some noteworthy bright spots, such as China’s recent decision to allow banks greater flexibility in setting interest rates for borrowers.
While economic conditions matter, ultimately it is secular growth themes, not short-term GDP data, that underpin the EM investment story. So, the deceleration we have seen thus far shouldn’t fundamentally negate our view of the opportunities. The recent volatility does however remind investors to do their homework. This choppiness will continue as EMs seek to manage their own growth against the backdrop of expanding importance in the global economy. The potential end of QE in the U.S. won’t make things any easier, either. As investors, the key is to be aware of the risks of each country and company. We are continuing to find many exciting companies in EMs that are doing the things that we believe can lead to sustainable growth potential for investments. Alternatively, we are accessing the secular opportunities through developed market companies. By doing both, we believe we’re especially well positioned.
The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Information contained herein is for informational purposes only and should not be considered investment advice.
The information in this report should not be considered a recommendation to purchase or sell any particular security.