Sentiment about emerging markets is prone to big swings. From
the late 1990s optimism, bordering on euphoria, was the order of
the day. That bubble burst more than five years ago. Since
then, but with some conspicuous exceptions, sentiment about
emerging markets has become increasingly negative.
China's long-term slowdown, widespread political turmoil,
falling commodity prices, and the withdrawal of capital by foreign
investors have all played a role. Emerging market equities have
taken a hammering and growth has softened.
At the start of this year sentiment hit a new low. The risk of a
hard landing for emerging economies, especially China, was widely
seen as the biggest danger to the global economy.
Those fears have not been realised. Indeed, while the world has
been pre-occupied by Brexit, the US Presidential Elections and the
failed Turkish coup, things have started to look up for emerging
Most strikingly investors have turned more positive. Capital
flows into emerging markets have risen sharply. In the last six
months emerging market equities have risen by almost 25%. Investor
demand for the debt of emerging market companies, one of the
riskiest of assets, has soared.
What lies behind this change in sentiment?
The pessimistic interpretation is that emerging markets are the
beneficiaries of weak growth and ultra-low interest rates in the
West. Brexit, by fuelling uncertainty and pushing interest rates
lower has added fuel to the fire. Investors have responded by
pulling capital out of the Western markets and putting it into
emerging economies where interest rates, growth and returns are
More positive factors are also at work.
Firmer commodity prices, often seen as a harbinger of stronger
global growth, have helped emerging market producers. Oil has led
the charge, with the price of Brent crude up 34% between the first
and second quarters of this year, and metals, timber and many other
commodity prices have firmed.
Emerging market growth is hardly stellar. China is likely to
grow at its slowest rate in 25 years this year, Brazil is in the
midst of its worst recession since the 1930s and the Russian
economy is contracting. But the downward trend for emerging market
activity as a whole seems to have run its course. Growth is widely
expected to accelerate in 2017. India is forecast to grow by 7.6%
next year, the fastest rate of growth among any major economy.
Brazil and Russia are likely emerge from recession. Chinese growth
is expected to ease, but, at a forecast 6.2% in 2017, would still
be far higher than global averages. Crucially, the risk of a
Chinese 'hard landing' have eased.
New pockets of fast growth are also emerging. Last week The
Economist noted that Vietnam has recorded the world's
second-fastest growth rate per person since 1990, behind only
China. Boosted by supply-side government reforms, a large and young
population and proximity to China, Vietnam seems to be on a rapid
growth path. Other emerging economies, including Kenya, Ethiopia,
the Philippines and Mexico should also maintain their strong
For the last five years the health of emerging economies has
been a growing pre-occupation for global policy makers. The risks
have certainly not been eliminated, but they have eased. That is
good news in a world where emerging markets account for almost 60%
of global output.
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