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Investment: Emerging Markets, To Buy or Not to Buy?
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Emerging Markets: To Buy or Not to Buy?

By Michael Dow

WBT201511_070__Investment__003_-_001With all the recent turmoil in the stocks, commodities and currency markets so far in 2015, investors have been left wondering whether or not it is still a good idea to plough their cash into the once sparkling emerging markets. This includes formerly attractive investment hubs like the so called BRICS (Brazil, Russia, India, China, and South Africa), the Four Asia Tigers (Hong Kong, Singapore, South Korea and Taiwan) and the other emerging economies in Southeast Asia, Latin America and Africa. There are plenty of good reasons to feel more apprehensive about these locations than before, but is it really time to pull out altogether and park your cash in the safe but slow developed economies?

It is hard to say exactly what has spooked financial markets the most. Geopolitical tensions, particularly in Eastern Europe, the Middle East and Asia, are certainly not helping matters but the markets originally shrugged off fears of any major economic consequences when the Ukraine crisis and quarrels in the South China Sea were at their worst a couple of years ago. It is more likely that investors have gradually become more bullish on developed markets and more bearish on the emerging ones. Most people now seem to have bought into the narrative of a full blown recovery in the United States and other big economies like the United Kingdom. Europe is still in terrible shape but nothing is new in that regard. Yet on the other hand, all we seem to hear about emerging economies these days is doom and gloom. China’s slowdown, in conjunction with the rollercoaster rides that have occurred in the country’s stock markets, has everyone from the big bankers on Wall Street to the individual private speculator panicking like mad. Ridiculously high inflation and government incompetence have seemingly destroyed Brazil’s credibility as an investment hub, whilst the political situations in Russia and Thailand need no introduction.

The one biggest individual factor that is really scaring people at the moment seems to be the prospect of Federal Reserve interest rate hikes at some point in the very near future.  People are now coming to terms with the fact that interest rate rises in America and other economically important European nations will probably create the double edged sword of a higher debt repayment burden and huge capital outflows from the emerging world. It is a frightening situation at a time when many of the upcoming economies are much more fragile than they have been over the last decade or so. The IMF has warned investors about these big risks several times in the last few months. They believe that, "shocks may originate in advanced or emerging markets, and, combined with unaddressed system vulnerabilities, could lead to a global asset-market disruption and a sudden drying up of market liquidity in many asset classes. Moreover, “recent market developments underscore the complexity of these challenges, as well as potentially stronger spill overs from China.

WBT201511_070__Investment__002_-_002But whilst most commentators now accept that there will be some big bumps in the road, not everyone is nervous about the upcoming rate rises. A U.S. interest-rate boost would help emerging markets by reducing uncertainty that’s kept investors from taking on risk there, according to JPMorgan Chase & Co.’s global head of research, Joyce Chang. “The Fed should get it over with,” she said in an interview after speaking on a panel discussion at the Institute of International Finance in Lima, Peru. Even Noriel Roubini, the prolific investor who is famous for prophesising economic crises, has recently come out in support of the emerging markets. He argued that, “most emerging markets are financially more sound today than they were a decade or two ago, when financial fragilities led to currency, banking, and sovereign-debt crises. Most now have flexible exchange rates, which leave them less vulnerable to a disruptive collapse of currency pegs, as well as ample reserves to shield them against a run on their currencies, government debt, and bank deposits. Perhaps even more importantly, he pointed out that,most also have a relatively smaller share of dollar debt relative to local-currency debt than they did a decade ago, which will limit the increase in their debt burden when the currency depreciates. All of these factors are very important indeed.

WBT201511_070__Investment__001_-HighlightLooking at it from a more long term perspective, in many ways the current sentiment towards these markets is a classic case of sound long-term macroeconomic fundamentals being ignored in favour of fear and pessimism. It is true that the shining stars of yesteryear – China, Brazil, Thailand, Indonesia and Russia – have fallen into pretty bad shape when it comes to debt, GDP and a whole range of other key gauges. Then again, India has rocketed back to strong growth and South Korea still looks fairly healthy all things considered. We also have to consider the fact that the slowdown of big important economies like China is in fact a slowdown and not a total economic implosion like much of the Western world experienced in 2008. The so called ‘new normal’ era, in which the Chinese economy grows at between 4-7% per year, looks mediocre when compared to the double digit GDP growth of the previous decade, but it still represents a clear path to progress and prosperity.

And while most of the emerging world’s economies may be slowing in terms of pure GDP growth there is still every reason to believe that in most of these cases, improvement of living standards, geopolitical stability and increasing spending power will persist for decades to come. Financial Times reporter Gideon Rachman has pointed out that,The future still belongs to the emerging markets. The rise of non-western economies is a deeply rooted historic shift that can survive any number of economic and political shocks. It would be a big mistake to confuse a temporary crisis with a change to this powerful trend. With that in mind it would probably be a good idea to keep some money in these increasingly powerful players in the new global economy so that their growing prosperity can boost your bank balance.

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