Is it time to redefine emerging markets?

13th July 2012

Second quarter growth of 7.6% – down from 8.1% in the previous three months – was in line with expectations, and many say the bad news has already been priced into the market.

And when compared with the UK, the figure appears far from shocking. Here, the economy shrank 0.4% in the final quarter of 2011 and then another 0.3% in the first quarter of 2012. We're now in the longest slump in more than a century, with growth predicted to slip into negative territory over the next few years.

So the argument for a new world order with a power shift from West to East isn't off track, although it's not without its setbacks.

China may still be set to supplant the US as the largest economy in the world, with Brazil and India also ousting some developed markets.

Anyway, aside from GDP, indicators that are now being more closely tracked by economists and hedge funds for a reading on the Chinese economy such as loan growth, power output, new investment projects and oil demand, while mixed, are painting a picture of strength ahead, economists told CNBC.

A new definition

However, it seems the catch-all classification ‘emerging markets' has lost much of its usefulness. This was invented in the 1980s by World Bank economist Antoine van Agtmael to replace LEDCs – ‘less economically developed countries'. The term made the assumption that these markets would follow the route laid down by ‘developed' economies, until they reached the stage of the US, the UK and other western countries.

Until relatively recently the 'emerging economy' tag has been associated with countries that are on an upward trajectory, making them a more attractive, if risky, place to invest, and relatively few countries have moved in the opposite direction.

But this soon changed.

The bigger emerging market countries have overtaken the weaker developed markets.

Specifically termed the BRIC nations, these economies expanded exponentially over the past ten years. And the latest bid to redefine the world of ‘emerging markets' comes again from Jim O'Neill, chairman of Goldman Sachs Asset Management.

The rise of the ‘Growth markets'?

This was promoted at Goldman Sachs Growth Market Summit in May. While the term might not have quite the same dynamism as BRICs, it comes from the man who coined ‘BRICs' so it should probably be taken seriously.

O'Neill is adding Mexico, South Korea, Turkey and Indonesia to a new grouping with the BRICs – Brazil, Russia, India and China – calling them all "growth markets".

"Brics was unashamedly a marketing ploy – but the nine-year-old term has stuck and spawned government summits, investment funds, business strategies and a queue of countries desperate to join the club," says FT Alphaville.

So is this simply a bid for publicity? And anyway, what defines membership? Goldman Sachs says it is separating out some countries from the traditional Emerging Markets universe-those that are at least 1% of global GDP. Eight countries currently satisfy this criterion: each of the BRIC countries (Brazil, Russia, India and China), as well as the four largest "Next 11" (N-11) countries: Mexico, Korea, Turkey and Indonesia.

Other countries could achieve Growth Market status over time-these include some of the other N-11 countries, namely Nigeria and the Philippines, and possibly Egypt. For now, however, they remain in the Emerging Markets group.

But there are all sorts of classifications and generalizations that get slavishly followed and prevent people from looking at fundamentals – and the media can be blamed for much of this with the array of acronyms in recent years. Consider CIVITS (Columbia, Indonesia, Vietnam, Egypt, Turkey and South Africa) as just one example of this.

Investors should cut through current issues and focus on the long-term potential in any country they consider investing in. For example, in China, the population is still younger than in the West; they have higher savings and a growing urban population, and they desire a higher standard of living and the companies are looking to grow and expand.

The Eurozone crisis is creating winners and losers among markets across the globe. This is also the case in BRICs, ‘Growth' – or whatever you want to call them. While the next decade of may not be as clear-cut as originally thought fundamentally, people need to think for themselves, and avoid the labels and negative headlines when making investment decisions.

 

More on Mindful Money

Why the BRICs will fall

Out of the fire: Is the Eurozone crisis creating new emerging markets?

Is 'emerging markets' an outdated term?

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