Reappraising Emerging Markets Risk
In an era where a global financial crisis has been caused not by developments in Russia, South-East Asia or Argentina, but by banking insolvency in the United States and sovereign default risks in a eurozone member state, namely Greece, our panel of senior commentators discusses what it means to be an ‘emerging market’. Justin Patrie, Head of Europe Analysis, Rahul Ghosh, Head of Asia Analysis and Mark Schaltuper, Head of Latin America Analysis at Business Monitor International explore how risk perceptions of emerging markets are shifting and what this will mean for the global macroeconomic outlook.
February 25th, 2010 at 6:10 pm
I agree with the panellists that it is nowadays difficult to disntimgsuish risk premiums between rich developed countries and ‘emerging markets’. However, I think that emerging markets are like many things in life: you cannot always decscribe it in words, but you know it when u see it. Take the case of Vietnam where I went on vacation. Not so many cash machines, lots of peoplel riding scooters on the streets, people selling food on the streets, etc… Or in Mexico, where the sidewalks are lined with people trying to sell you anything. But there are other places like Korea which look and feel like first world nations, more modern even than the USA. In fact, if you travel on the London subway, you could be forgiven that you are in the third world!
February 26th, 2010 at 12:41 am
It is too soon to say that emerging markets are safer than developed states. I see a risk that current dynamics could lead to complacency in emerging nations at a tome when they are still immature. This complacency could lead to wreckless policies that could cause probls later down the road, eg Chinas fiscal laxity. Also keep on mind other dangers on EM nations. Turkey has foiled a military coup, Thailand is permanently on brink of revolution, Mexico is in a state of civil war, India is barely a unified state, Russias survivability is on doubt, and Ghad knows what will happen in China if the bubble bursts. USA has proven record of dealing with such. Thank you
March 1st, 2010 at 11:38 am
Lara: Thank you very kindly for your comments! I can certainly appreciate how you feel regarding the relative disparities in infrastructure. I think I first noticed the issue 6 or 7 years ago when living in the United States and noting the truly terrible state of some American airports and mass transit systems (La Guardia and the el train in south Chicago come to mind).
I think the issue that you raise really points to the wide disparity within emerging markets though. No longer are all emerging markets similarly poor as might have been the case pre-1990′s. The size and scope of emerging markets is such that one can no longer treat them as a single asset class. Thus, I don’t know if we would “know it when you see it” in many cases now. The Asian tigers (HK, Singapore, Taiwan and South Korea) come to mind… I don’t think they can be recognised as feeling like emerging markets at this stage. The same can be said for some emerging European countries such as Slovenia and the Baltic states. That said, there are places that will still jump out as Emerging markets, such as Vietnam…
March 1st, 2010 at 11:45 am
Gregor: I completely agree. One of the biggest caveats to the ‘EM Growth Story’ over the next 10 years is that it is predicated on an assumption that the economic policies of the past decade are continued. There are very real risks that many governments will not learn lessons from the US and Western European experience and through bad policy, simply create different and even larger macroeconomic asymmetries. The key question is whether emerging markets have the capacity to take in this massive boom in capital inflows which are expected. Already, the IMF is talking about encouraging capital controls in EM states (unimaginable just a few months ago) to help stem the tide of investment. I know that this is very much an issue of concern for the Russian and Brazilian governments, who want to avoid excessive currency appreciation based on speculative capital flows and also avoid domestic asset price bubbles.
Of course, you very rightfully also bring up the issue of business environment and institutional protection issues in emerging markets. For all their growth potential, many of the largest emerging markets, including all four BRIC countries, have extremely difficult operating environments relative to most developed states. Managing corruption, inefficient bureaucracies, poor infrastructure and weak judicial protections remains a major concern.
This is why selectivity will remain absolutely key. As per my previous comment, emerging markets will broadly do well, but there will be fairly significant degrees of performance differentiation. Different markets will offer different opportunities and risks, and understanding those from a relative strategy perspective will be crucial for taking advantage of the upcoming growth cycle.