Where To Next For Emerging Markets?

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STILL OUTPERFORMING

To put the challenges facing emerging markets into perspective, nobody ever expected these countries to continue contributing to world growth on the unprecedented scale of the past three decades. In the early part of that period, events such as the integration of China and the former Soviet Union countries into the global economy gave a one-off boost to growth. More recently, economic weakness in the US and Europe since the financial crisis has exaggerated emerging markets’ relative importance.

In this context, the recent performance of many emerging markets looks more attractive. China’s official 6.9% October growth figure dwarfs that of any comparably sized economy. The IMF expects emerging markets to grow at 4.5% in 2016, compared to an average of 2.2% for developed economies, and the agency has downgraded growth forecasts more steeply for developed economies than for developing ones. Furthermore, within the emerging markets average, some figures are impressive by any standards—the forecast growth of 7.5% for India in 2016, for example.

Moreover, several trends set in motion by the emerging markets boom still have a long way to run. For example, it might be assumed that China’s love affair with Africa’s natural resources will wane, given changes to its own growth model. However, George Fang, Standard Bank’s Beijing-based head of mining and metals in Asia, says China will become an increasingly important capital exporter in the coming years, which will prompt “even more investment by Chinese firms looking to tap Africa’s resource superstructure, as well as other sectors.”

DEMOGRAPHIC TRENDS

Other emerging markets trends should also sustain growth. “Africa’s population will reach 2.5 billion by 2050,” notes Goolam Ballim, chief economist and global head of research at Standard Bank. “Equally important, the median age is 20, compared to 32 in Asia and 40 in Europe, while rapid urbanization is adding to the labor pool and increasing affluence. At the same time, financial services are deepening across the region as credit is made available, increasing consumers’ purchasing power.”

Indeed, middle classes across almost all emerging markets are burgeoning, making economies less reliant on external demand. According to research by European bank ING, the percentage of the world population defined as middle class will rise from 23%, or 1.8 billion people, to 52%, or 4.9 billion, in 2050. “As long as GDP growth continues to outpace population growth—as it does by some margin in Africa, for example—then purchasing power, and the size of the middle class, will grow,” says Ballim.

This wave of newly affluent citizens will have a profound effect on consumption. In the short term, consumption may face headwinds, such as weaker employment and real wage growth. But in the long term, the trajectory is clear. “Supportive demographics are driving Asian consumption on travel and leisure as well as cosmetics and healthcare,” notes Hyung Jin Lee, head of Asian equities at Baring Asset Management and manager of investment fund Baring Eastern Trust. “There are great opportunities as a result of the Chinese tourism wave, for example. It is only in recent years that many Chinese have taken their first trip abroad.”

Technology is also transforming established development patterns to emerging markets’ benefit. M-Pesa, a mobile money transfer service launched eight years ago, turned Kenya’s lack of fixed-line telecom infrastructure and limited banking reach to its advantage and has made the country the poster child for mobile money: About 70% of adults use the solution.

Similarly, mobile e-commerce in Asia has leapfrogged that in Europe and the US, with 45.6% of consumers having made a purchase using their smartphone, according to MasterCard. By comparison, fewer than 30% of UK consumers have bought something using a smartphone, according to coupon marketplace RetailMeNot. Research by McKinsey shows that Chinese e-tailing is boosting the economy by stimulating purchases that consumers would not otherwise make.

RESTRAINT AND RELIANCE

For Ashmore’s Dehn, the current panic about emerging markets reflects a failure on the part of analysts and investors to distinguish between financial markets and economic fundamentals. “Apart from Argentina and Ukraine, which are a case apart, there have been no sovereign defaults, no significant increases in corporate defaults, no runs on FX reserves and no balance-of-payments crises,” he says. “Emerging markets continue to hold 80% of the world’s FX reserves—which have fallen just 7% from their peak despite a 40% decline in the US dollar (in which reserves are denominated)—while these countries have just a third of the government debt of developed markets.”

Dehn says that most emerging markets countries have maintained a tight leash on inflation, so their currencies’ devaluation against the dollar is helping to enhance their competitiveness: Ninety percent of the emerging markets countries Ashmore tracks have enjoyed improvements to their current account.  “Moreover, the terms of trade have improved for two-thirds of emerging markets counties because the price of oil has fallen faster than that of other commodities,” says Dehn. “Ultimately, the emerging markets story remains sturdy. All that’s occurred to date is a small slowdown in growth.”