So, why are things looking so rosy for the Emerging Markets
and developing countries? Two very important factors are population growth and
productivity.
The rise in productivity is a natural progression and not
exactly difficult to achieve. To begin with the old, developed, countries are
exporting their expertise to the Emerging Market ones so they can make better
profit margins. However, the knowledge does not stay within but gets out. People
then improve what has been brought into the country and then send it back to the
Old World and/or keep it for themselves so as to improve the local community.
The perfect example of this is broadband. This was brought to South Korea by
America but the latter now has a broadband speed which is less than ten percent
of that of the former.
Another important factor is the fact that the Emerging
Markets are finding themselves at the start of the larger economic development
cycle. This means there are many investment opportunities for capital to be
allocated against thus resulting in the opportunity for these countries to
manage quick economic growth and, thereby, development. This then leads to the
continuous loop as quoted by Miton, “Investment spending creates employment
which in turn boosts income growth and subsequently consumption. This then
further stimulates investment spending, and so on. It is only once the number of
easily exploitable investment opportunities starts to diminish, that economies
slow and move on to the growth paths typically experienced by the mature
economies of today’s world.”
Despite the last bit, Emerging Markets still have a lot going
for them:
* EM debt ratios and fiscal deficits are less than half the
level of those in developed countries.
* Average debt to GDP for EM economies stands at only 33%
compared to 104% of GDP for DM in 2013.
* Since early 2008 DM have experienced 25 sovereign
downgrades, compared with 21 upgrades in emerging markets in 2010.
* Growing differential in favour of emerging markets - 5.8%
for emerging markets vs advanced economies potential growth of 1.6%.
* “We can rely on stimulating domestic demand to stabilise
and further grow the Chinese economy,” Premier Wen Jiabao, Bloomberg, 4 October,
2010.
Nonetheless, anyone who invests in Emerging Markets must not
lie back too much as there are risks which are not so apparent as they are in
the Old Developed World. For a start, it is a lot harder for an investor who is
not familiar with these markets to find a company that they will feel
comfortable with. This is because the economies of these countries are
comparatively immature when compared to those of the developed world and so the
natural course of who survives and who is killed off has not yet been completed.
There is also the issue of transparency and good governance. This is taken for
granted in economies which are fully developed but it cannot be taken do in
those of the Emerging Markets.
Despite the potential pitfalls, however, there is good money
to be made from the Emerging Markets and the risk/reward ratio looks quite good.
Without doubt, there will be volatility but the trend will be upward. Any short
term hiccups are only for day traders to worry about. People who are in it for
the long term should not lose any sleep over it. The continued low interest
rates in the West will continue to encourage more money towards the Emerging
Markets and until this changes and volatility hits unacceptable levels then the
New World Order should definitely be part of your portfolio.
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The above data and research was compiled from sources
believed to be reliable. However, neither MBMG International Ltd nor its
officers can accept any liability for any errors or omissions in the above
article nor bear any responsibility for any losses achieved as a result of any
actions taken or not taken as a consequence of reading the above article. For
more information please contact Graham Macdonald on [email protected]
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