The great thing about emerging market economies is that, usually, they grow. To be specific, they grow more quickly than developed markets such as the US, offering superior returns to investors who are willing to take the typical emerging market risks of frequent upsets and setbacks.
Indeed, perhaps the single most-watched indicator of projected returns on EM assets is the GDP growth differential between emerging markets and developed markets.
It cannot, therefore, be good news for EM investors that emerging markets are now growing at a slower pace than the US. David Hauner, emerging market strategist and economist at Bank of America, says that next year, as a group, emerging markets excluding China will grow more slowly than the US for the third year in a row.
Nor is China itself doing much better. BofA predicts that in 2022, the world’s two largest economies will be growing pretty much neck and neck, at just over 5 per cent a year.
“That is the lowest relative forecast differential literally in the history of the data since the 1980s,” Hauner said.
Faster growth in the US means a stronger dollar and rising US Treasury yields, which are both challenging for emerging market assets. Slower growth in China is bad, too. So what happens next will be crucial.
“We are approaching a super interesting junction,” Hauner said. “The next couple of months will deliver judgment day for the global economy and particularly for EMs.”
He paints two scenarios. In the first, energy prices, which have spiralled upwards in recent months on supply concerns, come back from their peak and relieve the pressure on global inflation, while policymakers in Beijing engineer a soft landing from the crisis in China’s property sector.
In the second scenario, energy prices keep going up and China’s slowdown gets nasty.
The first scenario delivers a return to the global recovery story that led investors to become interested in emerging markets at the start of this year. The second scenario delivers a significant unravelling of risky assets, especially emerging market stocks and bonds.
“Our view is the more constructive one,” said Hauner. But, he warned, it comes with a caveat. If it is right, investors can make a few percentage points. If it is wrong, the losses will be in double digits.
Source: Economy - ft.com
