Global Emerging Markets Global Emerging Markets:


A promising future


By Devan Kaloo, Aberdeen head of


Global Emerging Markets


Stock markets have been in turmoil on fears of renewed global recession and emerging markets have not been spared. In fact, they have fallen further than developing ones. Meanwhile the dollar has strengthened as investors have sought safety in liquidity. To the naysayers, these movements may have confirmed what they believed all along: that emerging markets have promised a lot but depend too far on the risky West. We disagree. We believe emerging


markets remain the best place to find higher long-term equity returns, and to diversify from the U.S. This is because of the underlying structural changes to their economies, including market-based reforms, positive demographics and consequent sustained high relative growth. If they now face a cyclical slowdown, that should be seen in terms of those advantages – which importantly investors can access through a growing number of high-quality, well- managed companies.


Lenders not borrowers The core attraction of emerging markets is their strong fundamentals. The majority are lenders not borrowers. Household savings are high (especially in Asia). With generally young populations they have few liabilities. Moreover, their export model, built on low costs and access to cheap raw materials, is changing as wealth gets recycled into domestic demand. While this may sound familiar enough,


what is less appreciated is the speed of this transformation, and the role China is playing. Today developing economies account for 38% of global GDP, twice their level of 20 years ago. In purchasing power parity terms that level is over 50%. Of course, the West’s sluggishness amplifies this shift. But it’s China, with its appetite for raw materials,


that has galvanized output. It accounts for 30-50% of the global demand for a range of base metals. For the many commodity producers across the developing world, this is a boon.


The prize: domestic markets Developing economies are using their exports revenues wisely. Money is being recycled into infrastructure, services, education and so on – and this is creating a benign environment for foreign direct investment. If the attraction used to be an export processing zone to sell low-value- added goods back to the U.S., nowadays the prize is often domestic market opening. Two-thirds of the world’s population live in the developing world. For portfolio investors, the opportunities


brought about by fast growth and the raised ambitions that come with it, are just as interesting. As part of their reforms, policymakers have become less defensive towards foreign inflows. They have the reserves to deal with hot money. Capital markets are deeper and more liquid. In Asia, which suffered its own meltdown a dozen years ago, balance sheets are stronger across the board – whether of governments, corporates or households. Evidence of these changes abounds.


Developing world companies have become unafraid of growing abroad and are willing buyers of Western assets. (Look at Tata in India, Cemex in Mexico or budding oil majors Petrochina and Petrobras). At the same time, their sovereign wealth funds from the Gulf to Singapore are tapped to help ailing Western banks. Western luxury goods makers list in Hong Kong because of its proximity to their burgeoning Chinese buyer base.


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