30th May 2012
At its most basic level, those emerging market countries with the lowest exposure to the Eurozone and the highest exposure to the US and/or strong domestic demand may end up with greater momentum. This may create a shift in the emerging market countries that will emerge strongest.
The rise of Mexico
For example, the Financial Times recently highlighted the tussle between Brazil and Mexico. Brazil has long been perceived as the 'growth' economy of the two Latin American behemoths. Until relatively recently Mexico's historic ties to the US were considered a significant disadvantage.
"Brazilian stock market data shows that between May 1 and 18 there was a net 2.5bn reais ($1.2bn) outflow in foreign investment in equities, although year-to-date data are still positive at $1.29bn
By contrast, in Mexico, where the IPC index has fallen more than 5 per cent this month, central bank data show foreign investment inflows in company equity of nearly $2bn between January and the end of April."
The article points to a Reuters article, which suggests: "Mexican stocks are drawing investors away from Brazil as Latin America's biggest economy loses steam and Mexico's close ties to the United States render it a safer bet in unsettled times."
Mexico is seeing a significant improvement in its economic figures, while investors are fretting about credit expansion and stalling growth in Brazil. The net result is that the two countries are likely to grow at a similar pace in 2012 – not the result that investors had expected.
The trouble with relying on commodities
Brazil is in the same bind as many emerging markets, in that it has built much of its wealth on its commodity exports. As global growth has slowed and commodity prices fallen, those countries for whom this is a vital part of their economy have suffered.
"Brazilian exports to China slowed down significantly in the first three months of the year, totalling US$ 7.9 billion, an increase of 10.5% over the same period last year, the lowest growth rate in recent years."
"Given weak global activity and heightened downside risks to the near-term outlook, commodity exporters may be in for a downturn," the IMF said.
"If downside risks to global economic growth materialize, there could be even greater challenges facing commodity exporters, most of which are emerging and developing economies."
This Bloomberg article argues that this is bad news for producers of iron-ore and copper, where prices are already falling. This threatens to impact Brazil and Chile, the two significant exporters of each commodity. This would also spell difficult times for many of the African commodity-dependent exporters. Russian GDP growth, of course, is dependent on the price of oil, but there is more at work in the price of oil than simply the Eurozone crisis.
Resisting Eurozone contagion
But even though China would appear to be a beneficiary in this scenario, until it builds a strong domestic demand base, it is vulnerable to slowing global growth. Its domestic demand base is growing, but it is not strong enough to support Chinese growth yet. India has traditionally been seen as the most insular economy. There are plenty of things wrong with the Indian economy, and it is certainly not immune from Eurozone problems, but it is generally seen as more isolated from the world's economic problems.
It should be said, that even if the Eurozone crisis changes the emerging market economic order, it may not change the response of markets. This piece shows how emerging market assets are affected by news from the Eurozone.
A new emerging market world order?
However, emerging markets as a whole are becoming more autonomous and eventually markets may catch up. "Despite the dip in 2009 the developing economies have performed well. They are not likely to be immune to a big shock in the western economies but they are more autonomous than in the past."
The Eurozone crisis is creating winners and losers among emerging markets. This may be direct – through trade routes – or indirect – through the impact on global growth and commodities prices. Either way, the next decade of emerging market growth may not be as clear-cut as originally thought.
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