It is not the Great Rotation, the Great War, the Great Depression, the Great Gatsby, Great Expectations or From Good to Great, but The Great Deceleration. This was the title of a recent Economist cover article in which it concluded that emerging markets are not at the beginning of a bust, but it is a turning point for the world economy.
“WHEN a champion sprinter falls short of his best speeds, it takes a while to determine whether he is temporarily on poor form or has permanently lost his edge. The same is true with emerging markets: the world economy’s 21st century sprinters. After a decade of surging growth, in which they led a global boom and then helped pull the world economy forwards in the face of the financial crisis, the emerging giants have slowed sharply.” (Economist 27 July, 2013)
China is in the midst of a precarious shift from investment-led growth to a more balanced, consumption-led model. We have said on numerous occasions that this will not be without hiccups, volatility or short term swings in sentiment, as it is not an easy task. However, the Chinese Central Government has the financial strength and a 7-year time mandate to make this work and avoid disaster.
In BlackRock’s recent institutional quarterly report entitled “Emerging Realities” one writer concluded that most developing economies face a correction, not a crisis. There is no doubt that emerging economies have evolved enormously over the past decade with stronger institutions, sounder macroeconomic policies and resilient banking sectors. There is also no doubt that emerging market countries with current account and trade deficits are facing stronger headwinds in the shorter term i.e. India, Indonesia, Turkey, South Africa etc., but the vastly weaker currencies will help these countries in the longer term.
Emerging market currencies, bonds and equities are much cheaper relative to their developed market counterparts, particularly the US, and are attractive from that trading perspective. However, one should never lose sight of the fact that “valuation is what matters for investing in emerging markets, not superior growth stories”.
The Great Deceleration
