8th May 2014
Emerging markets now make up 50% of the global economy says Ashmore head of research Jan Dehn.
In a note issued this week, Dehn says that much has been written about China overtaking the United States as the largest economy in the world this year but research by the IMF may show another fundamental shift in the global economic balance.
“However, we think the less publicised fact that EM now constitute – for the first time ever – more than 50% of global GDP is at least as relevant for investors. According to the IMF’s April 2014 World Economic Outlook, EM’s share of global GDP (PPP adjusted) reached 50.4% in 2013, up from 31% in 1980. This means that EM has increased its share of global GDP by an average of 0.6% per year over the past 33 years. Interestingly, the IMF expects EM share of global GDP to increase at an ever faster pace going forward.
“According to its forecasts, EM’s share of global GDP will grow by an average of 0.7% per year from now until 2019 to reach 54.5%. Allocations to EM by most central banks, sovereign wealth funds, public and private pension funds, endowments, foundations, and retail investors remain below what would be implied by simple GDP weighting.”
The note also offers an appraisal of the following markets.
China: Manufacturing is stabilising. Official manufacturing PMI in April was 50.4, up from 50.3 in March. HSBC’s Markit PMI also rose marginally from last month at 48.1 (versus 48 in March). We do not expect a sharp pick up in manufacturing or growth, because China is busy transforming its economy from export to domestic demand led. Transitions of this kind place a near-term tax on growth, but will ensure the sustainability of growth for the country once inflation returns in the world’s QE economies and EM currencies strengthen by virtue of the strong external balances. No country in the world will be more impacted by this change than China. China this week announced credit insurance measures and VAT rebates to aid exporters in their transition to a more volatile currency environment as part of the process of interest and capital account liberalisation.
India: Officials from the Finance Ministry in India said that the government will take steps to make the capital market more investor friendly after the ongoing election. This will include the establishment of an independent debt management office and allowing Euroclear settlement of Indian debt, as well as deepening the FX derivatives market. When viewed in conjunction with ongoing reforms of the Indian banking system our reading of the tea leaves suggests an opening of the Indian domestic bond market to foreign investors in the not-too distant future. The Indian domestic bond market is USD 760bn and we calculate that India would instantly become 10% of JP Morgan’s GBI-EM-GD index if capital account restrictions were removed.
Brazil: Responding to poll ratings that continue to slide ahead of elections in October, President Dilma Rousseff this week hit the panic button by announcing a 10% increase in Bolsa Familia, a popular income support scheme for low income workers. Dilma’s approval rating declined to 37% from 44%, according to pollster, MDA. Brazil’s public finances are deteriorating, but from a very strong base. The main challenge for the Dilma adminstration, in addition to winning the election, will be how to restore growth. This requires stronger business confidence and investment, but a clear lurch towards more heterodox policies under the leadership of Finance Minister Guide Mantega will make this difficult to achieve. Mantega’s policies have destroyed trust in the government’s handling of the economy and thus undone most of the enormous gains in credibility achieved under the previous administration. In a positive development, the trade balance was stronger than expected in April. At USD 506m, the surplus was more than twice as large as expected and year to date the trade balance has improved about 10% relative to last year at this time.
South Africa: South Africa’s trade balance worsened sharply in March. The deficit was ZAR 11.4bn compared to ZAR 1.5bn expected. Still, the monthly data is extremely volatile. Despite the worse than expected data, we do not worry about South Africa’s trade deficit. The South African Reserve Bank is highly credible and likely to tighten policy to keep inflation in check and ZAR has strengthened despite the print. South Africa’s corporates do not have material FX mismatches. In other economic news, both manufacturing and employment remained sluggish according to data released last week. While sluggishness is hardly surprising ahead of this week’s election, we think South Africa also struggles to overcome deeper structural growth impediments that are unlikely to be addressed in the near future.