Yesterday’s market darlings, Brazil, Russia, India and China, have failed to ignite the emerging market index despite their significant contribution to global GDP growth. In fact, the emerging market index has underperformed developed markets over the past decade despite the latter having less than half the economic growth.
To put this in perspective, the economic growth of India and China have created more than 45 “Greece’s” in the past 12 months alone and rank as the sixth and 15th fastest growing economies for 2015 and 2016, of the 191 countries assessed by the World Bank. Russia and Brazil have not fared so well, and have failed to live up to their pre-GFC hype, with another disappointing result for 2016 looking inevitable to put them in the bottom quintile at 187th and 186th positions respectively.
Thankfully for Brazil and Russia, the rebound in commodity markets is starting to impact their respective economies with improving economic data. We have seen the leading indicator trends looking particularly attractive in these regions, albeit from low levels, and PMI survey data is the strongest it has been in a year. Time will tell whether this translates into tomorrow’s winning economies, although it is interesting to see the markets are embracing the optimism with the emerging markets outperforming.
Equity Investors Welcome Inflation and Falling Rates
It is also interesting that neither Russia or Brazil have opted to borrow their way out of trouble. Debt to GDP ratios in both countries remain very low by global standards at 17.7% and 66.2% respectively and interest rates remain well above average. The strongest long-term returns from equities have historically come from a backdrop of falling interest rates and controlled inflation, similar to the golden period in the Western World from the late 1980’s to 2007. The idea is that the market can rally as stimulus is added to the economy, via interest rate cuts or other innovative means, although this is only possible when inflationary pressures are dampened.
As it currently stands, inflation is still problematic in these regions, however if commodity prices find stability and/or the Brazilian Real and Russian Ruble find support, it may be the catalyst for a revival.
We will be watching this space carefully as an area of opportunity. There are some trends underfoot, with a significant decline in inflationary pressures globally in recent months. This continues to receive mixed feedback, primarily because it is considered a sign of weakness in developed economies – fighting deflationary pressures, but will be a welcome relief for many of the emerging markets that have been unable to stimulate because of an inflation overhang.
Note, the caveat is that the headline inflation numbers currently contain a one-off commodity decline and may revert upwards once the impact of the crash is out of the numbers.
Emerging Economies’ Exports Outpace Developed
The last point of note in the economic section is the stark changes in export volumes. Obviously, strong volumes are a positive sign for global growth, and this has been traditionally achieved via the emerging markets. As we know, global exports fell through the floor in the past 12 months, along with import volumes, with most of this deterioration led by emerging economies.
Fortunately, this appears to be reversing with emerging economy export volumes now back in positive territory and outpacing the developed world once again. There are multiple reasons for this reversal; including relative currency weakness and the commodity market rebound – however this is undoubtedly a signal of strength for the emerging markets.
On the contrary, an area of concern is the continued weakness in the trade volumes in developed economies. This is especially important as a direct contributor towards GDP. Export volumes in advanced economies have actually tipped negative, which is an area of risk and something to observe going forward.
