Marathon effort for emerging markets
On your marks, get set, go! By the time you are reading this, the country will be gripped by the exploits of Team GB (in all sports bar the football) with expectations high for a record medal tally.
Given the huge investment in a number of Team GB’s sportsmen, it is no surprise that expectations are sky high for success but whether this matches up to reality remains to be seen. Translating this into economic terms the region with the most expectations for success in recent years has been global emerging markets, which is hardly a shock, given the dismal performance of their developed counterparts.
However, weak performance in 2011 has been followed up in the first half of this year with further reduced growth forecasts for many of the major GEM players. In this week’s cover story, Rodrigo Amaral (see page 10) questions whether investors have been over- enthusiastic about the prospects of emerging economies and whether the slowdown in their growth is long term or just a blip?
Looking at the first part of this question, given all the eurozone concerns, it hardly a surprise there has been a general flight to safety among investors. A quick look at the short-term stats may suggest why, over the past two years (May 2010 to May 2012) the S&P 500 has beaten the MSCI Emerging Markets index by 16 per cent in dollar terms and China by 30 per cent.
But what of the longer-term stats? Since December 1987 to 31 May 2012, emerging markets returned 1,600 per cent in dollar terms versus a 430 per cent return from the S&P 500. Meanwhile, versus the balance sheet recession the developed world is muddling through, much of the slowdown in China was caused by government actions to cool its property market. Indeed, apart from India, most major emerging markets in strong macroeconomic shape.
Indeed, in its latest evaluation of the global economic outlook, the IMF reduced its expectations for emerging and developing markets growth to 5.6 per cent in 2012 and 5.9 per cent in 2013, down 0.1 per cent and 0.2 per cent respectively from its previous forecast. While it is not the boom territory of a few years ago, it a lot healthier than we can expect from the Western world anytime soon.
So, to go back to the Olympic analogy, the above data would suggest it is a marathon not a sprint when it comes to the growth opportunities in emerging markets. If it was a sprint, think back to the most recent Athletic World Championships in which the fastest man on earth, Usain Bolt, was thrown out of the 100m final for one false start. A blip, yes, but this has not stopped all the betting on him retaining his Olympic title.
Will Dale Nicholls do a better job than Anthony Bolton running the Fidelity China Special Situations trust?