Investors globally fear the twin effects of a slowing Chinese economy and the US Federal Reserve’s tapering of its post-financial crisis stimulus programme on the world’s emerging economies, research from the Economist Intelligence Unit (EIU) notes.
However EIU’s report, sponsored by Bank of New York Mellon and entitled
‘What’s next for emerging markets?’
suggests that bullishness prevails on emerging markets (EMs) despite such concerns and the recent volatility that caused countries such as Turkey and India to hike interest rates.
“While they remain focused on developing economies, investors are wary of the asset class as a whole, and more investors are taking the time to consider the economic prospects of individual countries within the larger asset category to determine where value lies ahead,” the report suggests.
It adds that despite real politico-economic vulnerabilities in key developing countries and the possible effects of Fed tapering, these economies are still well-positioned in the global economy and will likely continue to grow.
The report, which canvassed opinion from 730 institutional investors, adds that they are encouraged by Chinese government efforts to create an internally driven economy that can withstand weaker demand from developed markets.
Leo Abruzzese, EIU’s global forecasting director, believes that as it becomes a middle-income nation, China won’t grow as fast but it will add more to gross domestic product (GDP) in absolute dollar terms than when it grew at an annual rate of 14%.
He adds that many EMs such as India, Brazil and African countries are endowed with large young populations and have great growth potential should they manage much-needed infrastructure reform. Additionally, recovery in developed economies will boost EMs in the medium term – largely by supporting emerging market exports. Promoting a growth model based more on domestic consumer spending and a lower volume of exports – as China’s new government is doing – should create a foundation for more sustained growth moving forward.
The report sees the biggest challenge for EM investors as weathering abrupt changes in capital flows. If tapering is smooth and slow, then capital flows will not be disruptive. Yet, since the Fed’s bond-buying programme has been unprecedented both in its scale as well as substance, no one knows how tapering will affect global financial markets.
The report concludes that EMs remain risky for a reason – an urgent need for structural reforms, widespread corruption and a lack of transparency still plague most of them. If there’s panic in one or more countries, no one wants to be the last one holding Turkish stocks or South African rands (ZAR).
“At their best, EMs offer an exhilarating ride up and, at worst, a white-knuckle descent,” say the report’s authors. “For now, investors should enjoy the relative calm in these markets at year’s end. It might not last long.”
The full report can be accessed free of charge
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