The US sub-prime crisis has sparked one of the biggest financial shocks of the last decade, yet emerging markets have proved resilient to volatility and our outlook for these markets remains positive, as we see growing evidence of their decoupling from the US economy.
The emerging market economies are in good shape to withstand any US weakness, even if interest rates remain around current levels. Around 75 per cent of global growth comes from emerging markets and, barring a major recession, the US economy alone should not affect the growth outlook dramatically.
The next decade is predicted to be a peak period for global growth, led by emerging markets and, in particular, the economies of Brazil, Russia, India and China. The International Monetary Fund says China will account for a quarter of global growth. Turbulence in the US credit market is unlikely to diminish China’s appetite for commodities, given its ongoing industrialisation.
Commodity demand from China and India should boost many resource-rich developing countries, particularly in South America. Along with improved budget balances and current account surpluses, this should continue to support the infrastructure boom across emerging markets. Analysts forecast infrastructure spending of over $1trn in emerging markets in the next three years, of which $575bn will be spent in emerging Europe, the Middle East and Africa, particularly Russia and the Gulf states.
Russia’s oil wealth and burgeoning budget surplus are funding its infrastructure spending and some of this will go on improving the oil distribution network, creating a steady future revenue flow from commodities. This should ensure that Russia’s extensive oil and gas reserves remain a key driver behind its growth, cementing its position as one of the world’s energy superpowers. The main threat to Russia would seem to be a dramatic fall in oil prices rather than US economic weakness but given its buoyant fiscal position, there is good reason to be optimistic over Russia’s economic and market prospects.
Asian economies should prove relatively resilient to US events. Its institutions have been heavy investors in US financial markets but their exposure to sub-prime mortgages has been relatively small. Asia’s dependence on the US economy is shrinking. The region is still relatively export-dependent but markets such as Europe, Japan and the developing world are playing an increasingly important role.
Domestic demand has also shown signs of improvement across the region. Asian markets are still affected by their US counterparts in the short term but are showing clear signs of decoupling, which is undoubtedly positive in the long term.
It is perhaps Latin America that will be most affected by a US economic downturn. Mexico is more immediately reliant on the US economy, as it sends 85 per cent of its exports to the US. However, an increasing number of domestically focused companies in Latin America are thriving without having to rely on exports.
Brazil leads this growth. Latin America’s biggest stockmarket has doubled in value over the last three years. Companies are enjoying the benefits of an increasingly favourable political and economic backdrop which has resulted in some spectacular earnings’ growth. The upgrading of Brazilian debt has been supportive, with some forecasters predicting it will achieve investment-grade status by 2009. Companies are benefiting from the fact that Brazil is one of the few countries cutting interest rates, which has had a positive effect on its housing market.
Economic weakness in the US may have a negative short-term effect on emerging markets but is an opportunity for many countries to show they are finally coming of age and no longer heavily reliant on the US. These markets are in a much stronger position to withstand any credit or growth setback and should thrive going forward.
Andrew Ness is investment director of global emerging market equities at Scottish Widows Investment Partnership