EMERGING MARKETS EXODUS: IRRATIONALITY OR SHORT-TERMISM?

New Year, new challenges as says the adage. Following a very turbulent 2014 year, requesting additional challenges for 2015 would seem relatively risky!

Altogether, 2014 most important events (Fed tapering , Russian crisis, Brazil and Mexico corruption scandals, UE persistent decline and China’s economic slowdown) were enough to create a movement of general panic , leading to severe market corrections. Unsurpringly, the latter induced large outflows from emerging markets first on the frontline in case of general dread.

Are economic forecasts reliable?

One important thing to assert anyway is the fact that economic forecasts have been most of the time wrong, undervalued or over-estimated. As if major events were following each other, leaving investors totally disoriented about where to invest. If one looks backwards since 2008, it is quite astonishing how economic forecasts have barely been able to match reality, at least so far.

  • Although Europe did not manage yet to solve its structural problems, the Union is still there and did not collapse as it was feared at that time.
  • Predictions over the US economy did not materialize either: the economy did not collapse and most surprinsigly is now bouncing back, supported by a reduction in unemployment and shale gaz fracking industry that no one had actually anticipated.
  • China was forecasted to overpass the US but it seems that timing’s not there yet.
  • Assumptions that China would experience a hard landing did not materialize yet.

A global “system” engaged in a long-term restructuring..where emerging markets will definity stand out…

Albeit the above, one thing is certain: the current global “system” is engaged in a process of long-term restructuring. Supported by geopolitcal and economical interests, the pieces of the puzzle are gradually moving, redesigning at the same time regional economic powers.

Is it however enough reason to flee emerging markets, potentially losing long-term growth potential?

Ironically, investing in emerging markets is like investing in a child’s education :) stressful and relatively chaotic on the short-term but definitly worthy on the long-run!

Putting it in a nutshell, below are some key factors that will, in my opinion, drive the next two decades global economic growth. Notwithstanding the rebound capacity of old great powers (US, EU, Russia), emerging markets will definitely be the next winners generation.

China’s New Silk Road and enhanced ties with Latin America

While most are worrying about China’s economic slowdown (which will certainly have serious impacts in the short-term), one should probably focus on long-term prospects and see to what extent China is already preparing its second phase of economic growth. Although economic datas are objectively questionable and should call to cautious, economic and demographic fundamentals make it clear that China will gradually expand its geopolitcal influence, making it a key partner on the international stage.

  • Aimed at financing a huge infrastructure that will link China with three continents through railroads, pipelines and roadways, the New Silk road investment is a project that if brought to life , will definitely reinforce China’s geopolitical influence.
  • China incrased ties with Latin America were confirmed with the meeting that CELAC (Latin American and Carribean community) held with China and Beijing in January 2015. With objectives comparable to the New Silk Road project, China’s investments in Latin America aim at enhancing bilateral trades and geopolitical influence in a traditional US backyard.

Latin America and US rapprochement

Brazil’s recent revival of trade relations with the US , US rapprochement with Cuba, Mexico structural reforms and integrated production chain with US are all green lights that should definitely benefit Latin America if US economic rebound is confirmed. Likewise Asia, Latin America benefits from specific pilars (Brazil, Chile, Peru, Mexico, Colombia) that could definitely uplift the continent’s potential providing structural reforms are well managed and led to the end.

South East Asia growing influence

Considered as engine of growth for 2015, ASEAN tigers are aimed at experiencing a strong growth story over the next decade. Confidence in ASEAN potential has recently been reinforced by the slump in crude oil prices. Notwithstanding the benefit of lower commodities prices, ASEAN long-term potential is more than anything supported by its rapidly expanding middle-class, low-income labour and strategic international trade location (crossroads of China, India and Latin America).

 Africa

Still tiny compared to investors interest in Asia and Latin America, the appeal for Africa is slowly growing and should dramatically expand over the next two decades. Supported by Chinese government loans and commodities bonanza, the African continent has experienced an impressive economic growth over the last ten years reporting on average a 6% annual growth rate. Many obstacles are still on the road but looking at long-term prospects, Africa is definitely on tracks thanks to a gradual shift from commodities to consumption and infrastructure sectors.

All in all, short-term obstacles remain but emerging and even frontier markets are definitely on tracks to deliver the next generation growth potential. Political, environmental and even economical unrest will bring about ups and downs but long-term outlook clearly plays in favor of those emerging nations.

Sources:

E&Y- Africa 2014- executing growth

Wharton Knowledge – ASEAN 2015

Think Advisor – November 20, 2014 – New Silk Road