In contrast, in emerging markets, it is less about deleveraging and more about a cyclical slowdown driven by the deleveraging that is occurring in the West. Developing countries will suffer from a decline in global growth and linked to this a fall in the demand for exports.
Here, it is important to distinguish between economies and stock- markets. Emerging economies are generally in good shape relative to their developed peers. Government debt to GDP in most cases is lower among emerging countries compared with countries IN the Eurozone, Japan, the UK and the US. The fiscal balance, current accounts and foreign exchange reserves of emerging economies are also relatively healthy. If this global financial crisis had occurred maybe five, 10 or 15 years ago, there would have been a lot more emerging market countries in trouble.
In addition, if you look at the emerging stockmarkets, the marginal buyer or the big buyer of equities is the overseas, not local investor. Consequently, stockmarkets are dependent on the recycling of capital from developed markets into developing stockmarkets.
So the prognosis of emerging markets is not particularly bright. However, there are reasons to be optimistic. A significant factor is that over the next 12 months, interest rates globally are likely to continue to fall as inflation becomes less of a concern.
In developed countries, interest rate cuts alone are unlikely to stimulate economic demand – structural deleveraging has to occur first. In contrast, because the problems in emerging markets are cyclical, the cutting of interest rates might work in stimulating domestic consumption and investment so we may see quite a wide differential in growth between emerging economies and developed economies.
Although growth rates in developing countries will not be at the same levels that we have seen over the last five years, they will certainly be stronger than we will see in developed countries.
From a company perspective, many businesses are likely to suffer, particularly those focused on export markets and/or with high levels of debt. However, there remains a significant minority of companies in emerging markets around the world that have strong business models, robust balance sheets and management that have experienced and weathered previous downturns.
Indeed, we expect M&A activity to increase as stronger companies take advantages of the woes of their rivals by increasing their market share.
Overall, I am perhaps surprisingly upbeat about emerging markets over the next 18 months. There will be an increasing differentiation between developed and developing economies and markets.
Meanwhile, although conditions in all markets will continue to be challenging, disciplined stockpickers who invest in quality companies should do well.
Devan Kaloo is head of global emerging markets at Aberdeen Asset Managers