Emerging Market Growth

Emerging markets are quite popular these days. As the developed world bumps along with one or two percent growth and rampant talk of double dip recessions, the emerging markets seem to roar ahead with ever more impressive numbers.

The growth rate in China is always impressive. Lately it has been even more so. It has chalked up its usual double digit growth. But other BRIC countries are not far behind. India is forecast to grow 8.5 per cent continuing its impressive trend of the past few years in the teeth of the worst global recession in almost 80 years. Even better than India is Brazil with a growth rate of 9 per cent. The IMF expects emerging economies as a whole to grow 6.9% this year and 6.8% in 2011, far better than their forecast of 2.3 per cent in 2010 and 2.6 per cent in 2011 for developed countries.

Growth like this attracts investors like bees to the proverbial honey. In one week at the end of July global emerging markets funds took in $796 million while US money market funds lost $15.3 billion. According to JP Morgan emerging market bond funds have taken in $50 billion in fresh money surpassing 2009 when they took in $46 billion. They are forecast to break all records by the end of the year with a record inflow of $75 billion. According to Morningstar, the bond rating agency, the second ranked fund for new assets was a global bond fund, Templeton Global Bond.

Of course these markets have their adherents. The China Stock Digest, a China-oriented investment letter, crowed that "China has resumed its economic boom in full. It is as if the global economic crisis had never happened." It also quotes none other than former Federal Reserve Chairman Alan Greenspan as saying “'China is the most dynamic capitalist economy in the world.” The statement is interesting not for its truth, but for the perspective of someone who helped cause one of the most severe economic disasters in history.

The fact that Greenspan thinks things in emerging markets are great should be a tip off that there are problems brewing. First we should start with deficits. While China is running a surplus of 4 per cent, Germany surpasses it with 5 per cent. The US is famous for its 3 per cent deficit, but India is on course to run a deficit at the same level. Brazil’s is a little better with a projected deficit of 2.7 per cent.

The amount of stimulus money sloshing around western markets may not prevent a double dip often because it is seeking greener pastures elsewhere. According to the IMF low interest rates have created a carry trade increasing capital flows to emerging markets that drive up asset prices.

Much has been written about whether China is experiencing a real estate bubble. Its real estate market has increased 61 per cent in the last six months alone. But real estate booms know no boundaries. In Brazil prices are also going wild. In some markets it has increased 100 per cent in the last 14 months. At the start of the recession India’s real estate market fell 25 per cent, but has now recovered with a vengeance.

Capital inflows and vibrant economies of course lead to inflation. Indian inflation is already above double digits at 11.6 per cent followed by Turkey at 8.7 per cent and Brazil at 5 per cent. China is supposed to have inflation under control and is thought to be ‘tightening’. Still it has to be seen to be believed. Besides real estate, food prices are up. Wholesale corn prices in local markets in China are at record levels and to control prices China is importing the highest amount of grains since crop failures in 1994-1995.

All of these problems are reflected in the various stock markets. From their crash lows the Indian, Brazilian, and Chinese markets made remarkable recoveries. They increased 96 per cent, 53 per cent and 22 per cent respectively. But these fabulous numbers were made a year ago. Since then the picture has not been as bright. From January of 2010, the Indian stock market has increased 4 per cent, but the Brazilian market is off 9 per cent and dynamic China is down 20 per cent, the worst performing market in the world after Greece.

It is not only that these markets are down, they are also, despite the recent press, volatile with more inherent risk. According to the eminent Indian business journalist, Sucheta Dalal, the Managing Editor Moneylife, Indian securities markets are “narrow, shallow, illiquid and concentrated in the hands of a few individuals located at a few centers.” The Chinese stock market has been described for many years as worse than a casino.

The emerging market “story” is certainly seductive. Vibrant new economies with huge hard working, well trained and inexpensive populations have found the formula for explosive growth. These economies are supposed to have decoupled from more developed economies and will, for the foreseeable, future be the source of vast profits available for anyone who believes. Sadly the reality can be much more mundane. They go up and down like everything else.

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