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Domestic upheaval

The majority of emerging markets have not escaped the global liquidity crisis unscathed but there have not been any material changes in the fundamentals of emerging market economies. The factors underpinning growth remain in place.

It was always unlikely that a recession in the developed world would go completely unnoticed in emerging markets but these countries are succeeding in promoting domestic demand and the importance of exports to the West is diminishing. Economic data from across the emerging markets asset class continues to confirm our belief that growth in selective countries remains relatively strong versus the global average, particularly in India and China.

Infrastructure spending continues to grow and we are seeing the emergence of a stronger consumer market across the emerging nations. We expect these factors to play a central role in the expected growth trajectory of emerging markets of around $22tn over the next decade.

Governments are spending significant amounts on upgrading power, water, roads and airports to sustain growth. Morgan Stanley estimates that government spending on infrastructure will be $21.7tn over the next decade. This is not being financed by debt. Strong economic growth and surging commodity prices have resulted in big budget surpluses for governments. Firms are also investing in capital equipment to boost capacity. This is vital to keep up with domestic demand.

One significant effect of this surge in economic growth is an increase in urbanisation. Throughout developing nations, people are moving to cities to chase employment opportunities and the chance to take part in their country’s economic boom, putting immense pressure on housing, roads, public transport, water and sanitation. The strain on infrastructure will only get worse, unless spending continues to grow. This will create a virtuous circle as living standards increase, promoting further growth.

Urbanisation has been particularly pronounced in China and it has been one of the world’s biggest spenders on infrastructure in recent years. Chinese authorities are now attempting to cool its booming economy but India and Russia are stepping up infrastructure spending and will fill any gap left if Chinese growth is curbed.

Looking at the Latin American markets, infrastructure projects and the shortage of homes in countries such as Brazil and Mexico will help to mitigate some of the slowdown that they will see from the US. Mexico has a deficit of three to five million houses and demand is anticipated for up to one million new homes a year which creates an opportunity for long-term housing construction.

Added to the pressure of a housing shortage is the emergence of a mortgage market. Predominantly a cash purchase market at present, countries such as Brazil are seeing mortgages becoming more established, converting potential demand for property into real demand across a much bigger proportion of the population. We expect Brazilian housebuilder Abyara be one of the key beneficiaries of this trend.

The significant amounts being spent on infrastructure are helping to boost domestic demand and we believe that emerging markets are in a much stronger position to withstand setbacks to growth caused by credit market turmoil. The region generally has strong foreign exchange reserves, low corporate debt and high household savings.

Financial companies in many emerging markets have not been drawn into high-risk loans as the sector is still underdeveloped. Only 18 million Russians out of a total population of over 145 million have bank accounts. This leaves significant scope for the growth of financial services in areas such as mortgages and credit cards.

During a credit crunch, creditors should outperform debtors and emerging markets generally fall into the former category. The decoupling story remains convincing.

Kim Catechis is head of global emerging markets at Scottish Widows Investment Partnership


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