While growth rates in many economies have slowed in recent years, emerging markets are generally still growing much faster than developed markets.
We expect a growing middle class, coupled with higher disposable incomes and low penetration in products such as cars, computers and mobile phones, to boost domestic consumption in the long term, further supporting GDP growth.
In addition, we think high foreign exchange reserves and relatively lower debt levels bode well for emerging markets, potentially allowing governments to withstand external financial shocks. In terms of valuations, emerging markets have remained attractive, with a 12-month forward P/E ratio of 10 times, while developed markets, as represented by the MSCI World index, are more expensive at a P/E of 12 times.
Emerging markets rallied in the third quarter of 2012, outperforming their developed counterparts, as financial markets remained awash with liquidity. The US Federal Reserve’s third round of quantitative easing (QE3), the European Central Bank’s Outright Monetary Transactions measure and the Bank of Japan’s US$1trn asset-purchase program, as well as the ratification of the eurozone’s European Stability Mechanism, triggered the rally.
But those billions of dollars will not all flow into what are perceived to be “safe haven” assets such as US treasuries and other government bonds, as seems to be generally believed.
In our view, QE3 is very good for emerging markets because it means there is lots of cash in the system. As such, we expect more inflows into stock markets generally.
However, economic growth in Brazil eased to 0.5% year-on-year in the second quarter of the year, from 0.8% year-on-year in the first three months of 2012, due to a contraction in the industrial sector and weakness in investment and domestic consumption. The government subsequently lowered its 2012 GDP growth forecast to 2% from 3%, while the Central Bank cut its estimate to 1.6% from 2.5%.
Meanwhile, in Asia, the People’s Bank of China unexpectedly cut rates in early July, less than one month after the reduction in June, to support the domestic economy. For the first half of 2012, the Chinese economy grew 7.8% year-on-year. While this growth rate was slower than that recorded in recent years, it was still faster than its global counterparts.
We are not only looking at the macroeconomic facts at hand, but as bottom-up investors, feel it is equally important to examine company-specific fundamentals too. Our long-term view on China remains positive, despite the recent noise.
Despite the risk aversion to seize financial markets since the eurozone crisis erupted, money has been pouring not only into emerging markets but into the newer and smaller frontier markets too.
Mark Mobius is executive chairman at Templeton Emerging Markets Group
-EMs are generally still growing much faster than developed markets
-QE is very good for EMs because it means there is lots of cash in the system
-The psychology of risk aversion that has seized financial markets
-Slowdown in Brazil’s growth due to a contraction in the industrial sector and weakness in investment and domestic consumption
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Traditional drivers are being increasingly challenged by global headwinds and investors must adapt, writes Gary Greenberg, head of emerging markets at Hermes Investment Management.
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