The Daily Telegraph
By Tracy Corrigan
Last Updated: 10:12PM GMT 20 Nov 2008
Splitting the world, as many institutional investors do, into two sorts of financial markets, emerging and developed, has always been an oversimplification. But whatever logic once underpinned this great divide has been eroded, as a result of a global economic crisis that was made in the US mortgage markets and disseminated thanks to overly lax US and UK monetary policy and irresponsible lending by US and European banks.
At the very least, the status of some emerging markets is due for an upgrade, if only in relative terms. It turns out that some, such as Brazil, currently look rather less risky on many measures than some developed ones, such as the UK. In terms of its trade surplus, indebtedness as a proportion of gross domestic product, and the size of its foreign exchange reserves, Brazil beats the UK hands down. Its economy is still expected to grow at 3pc next year, while the UK's is currently shrinking. And although Brazilian inflation is rising, it appears to be under control.
No wonder that BNY Mellon Asset Management, among others, is keen on Brazil, noting that "the growing maturity of its capital markets has been driven by sustained macroeconomic stability, declining interest rates, better corporate governance and management practices and the steady growth of its middle class consumer sector".
There is also plenty of evidence to suggest that the recession which has hit the US and Europe is not merely a cyclical downturn but marks a long-term shift of economic power towards China and other large emerging markets. This is partly the result of global demographic trends – for example, the ageing of the baby-boom generation makes it likely that US consumption will not rebound to previous levels, according to some economists. And this shift has already started. There could no longer be a credible G-anything meeting to try to coordinate monetary and fiscal policy without including the Chinese. That is a tacit recognition of the reality that China is not only an economic powerhouse, but has the additional clout that comes with American dependence on Chinese central bank purchases of US Treasuries to prop up its ballooning borrowing plans.
So what exactly is an emerging market? The term "emerging market economy" was invented by the World Bank 30 years ago and it is defined on the basis of low per-capita income. At that time, it was assumed that these economies were unstable and in the process of economic and market reform. Only the wiser governments of the US and Europe could be counted on to demonstrate fiscal responsibility, it was judged – and this was usually the case. This assumption still persists, even though the Brazilian government has in recent years dutifully followed rules championed by Western economists, while the US, UK and others have flouted them.
Still, reputations for bad behaviour, as some of us remember from our school days, tend to linger, even after reform should have triggered a thorough reappraisal. Jerome Booth, chief economist at emerging markets investment group Ashmore, notes that investors still have, a "binary view of risk", influenced by factors other than economics, such as geography. Italy and Iceland, for example, are lifted by the mere fact of being European, whereas Brazil suffers from a "bad neighbourhood" problem. It stretches credulity but Iceland, which was yesterday bailed out by the International Monetary Fund, boasted the top Moody's debt rating of triple-A as recently as May this year. As one analyst noted succinctly when it was downgraded: "Iceland had no business being triple-A in the first place." If Iceland were a tiny country in Latin America, you can bet it never would have been.
Emerging markets have performed pretty poorly since the start of the credit crisis, dashing hopes of a "decoupling". For example, in the 12 months to the end of October, the JP Morgan Emerging Market Bond Index returned 4pc, compared with 33pc for the global index (for sterling-based investors), as investors seeking to reduce risk piled out of emerging markets. Furthermore, when liquidity dries up, less actively traded emerging markets are bound to suffer more. However, within this poor overall performance, investors have picked out some favourites – Brazil returned 16pc over the same period.
If, as many expect, developed markets struggle to shrug off recession, emerging markets – now considerably cheaper – will start to seem more desirable. Mr Booth's view is that pension funds should aim to invest 35pc of their portfolios in emerging markets, across a broad range of asset classes including private equity. This seems perfectly sensible – but attitudes, as well as economic realities, need to change first.
sexta-feira, 21 de novembro de 2008
Brazil and China emerge as models of stability while UK looks risky bet
Publicado por Agência de Notícias às 21.11.08
Marcadores: Internacionais sobre o Brasil
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