Emerging Markets - Major Markets

By definition an emerging market economy is one that has a low to middle per capita income which is in the process of moving from a closed economy to an open market economy. They currently represent approximately 20% of global economies. Although China is considered to be one of the largest economies of the world it is still classified as an emerging market due to its developments and reforms and low capita income per head. In general, emerging markets are deemed to be fast-growing economies into which developed economies look for new sources of income, and through their investment the emerging economy’s production levels rise thus increasing their GDP.

The four largest emerging economies are Brazil, Russia, India and China, often abbreviated to the BRICs and the next four largest are Mexico, Indonesia, South Korea and Turkey. More recently, focus has fallen on Mexico, Indonesia, Nigeria and Turkey, now known as the MINT economies as the four emerging economies with the most promise.

Emerging market economies experienced a challenging end to 2013 as the interest rates of developed economies reached rock bottom, commodity prices eased, demand from China slowed and the Federal Reserve Bank in America commenced the tapering of quantitative easing. Fear grew that increasing interest rates in the developed economies would result in negative returns in emerging market economies.

In January 2014 the IMF predicted growth of 5.1% in 2014 and 5.4% in 2015 for emerging and developing economies compared with growth of only 2.2% in 2014 and 2.3% in 2015 for advanced economies.

It would be dangerous to treat all emerging economies the same and this is reflected in the various economic figures, as estimated by the IMF, and it is difficult to predict which sectors or countries will do best.

The IMF are currently predicting GDP of 1.8% in 2014 and 2.6% for 2015 for Brazil and inflation of 5.9% in 2014 falling to 5.5% in 2015 whilst unemployment is forecast to rise from 5.3% in 2014 to 5.8% in 2015. For Russia the figures are GDP of 1.3% in 2014 and 2.3% in 2015 together with inflation of 5.7% in 2014 falling to 5.3% in 2015 whilst unemployment is forecast to hold steady at 6.2% for both years. For India, GDP of 5.4% in 2014 and 6.3% in 2015 with inflation of 7.9% in 2014 falling to 7.5% in 2015. They do not have any unemployment rates for India. For China, the GDP figure is 7.5% in 2014 and 7.2% in 2015 with inflation of 3% in both 2014 and 2015 whilst unemployment is forecast to hold steady at 4.1%.

The MINT economies of Mexico Indonesia and Turkey all have stable inflation and public finances whilst Mexico, Nigeria and Indonesia are in the G20 bloc of developing nations.

Tapering will result in a fall in global dollar liquidity which could damage those emerging market economies who are heavily reliant on external financing of their current account deficits or those with domestic weaknesses. This could result in an outflow of foreign capital in the short term which would push their exchange rates lower and in turn lower the inflationary expectations. This would subsequently reduce economic activity and could result in a need to raise interest rates to maintain currency levels, thus causing domestic growth to stall. The countries most at risk of this are the “fragile five” of Brazil, South Africa, India, Turkey and Indonesia.

Fears of a slow-down in China has also put pressure on emerging market economies. Recent Chinese PMI data has shown that the economy there continues to contract, albeit at a slower rate. However, based on the average figure over the first quarter there is evidence of a small rise which could mean the GDP growth might improve in the second quarter from its recent low of 7.4%. There have been signs of an increase in both output and new orders, and in particular export orders, since the beginning of the year. The improving economic conditions in the overseas markets of the US, the UK, Europe and Japan should be feeding through to China’s export figures. Another sign of this pick up is the reduction in inventories of finished goods in China and an increase in the purchasing of raw materials.

Global growth in April was at its slowest rate since last October hindered by the sluggish rate of growth in the emerging market economies. The HSBC Emerging Markets Index, a weighted composite indicator from national HSBC Purchasing Managers’ Index showed that emerging market output growth remained weak in April recording only a marginal increase from 50.3 to 50.4, which is far short of its 8.5 year long run trend of 53.9. Both the manufacturing and services PMIs of the emerging markets were sluggish. 

The BRIC emerging economies all came in below 50. The most marked fall being in Russia where the PMI figure was the lowest recorded since May 2009. Business activity in India fell for the 9^th time in 10 months but there are hopes of a recovery following the recent general election results.

In the global table of manufacturing PMIs, the Czech Republic, came in second to the UK, ahead of Ireland, the US and Germany. Brazil, Russia and China were all below 50 whilst India managed to climb above 51. The only other country to record below 50 was Japan although this could be a temporary situation attributable to a sales tax hike in the country. Japan had seen strong growth in previous months as consumers brought forward their spending ahead of the tax increase on the 1^st April so it is likely that this will only have temporary impact.

Seven of the countries to record a PMI figure below the global average of 52 came from the emerging markets. These were Mexico, India, Indonesia, Turkey, South Korea, Singapore and Indonesia, whilst there was better growth in Vietnam and Taiwan.

For long term investors emerging market economies should continue to produce good returns despite the recent setbacks, however further volatility can be expected. Many of the countries have large young populations who aspire to Western standards of living. This will require huge investment from governments and structural reforms but should drive growth in these areas for decades. 

Darren Winters