Wednesday, March 31, 2010

Emerged Markets

For the past decade the emerging market investment theme has been the most compelling long term. Traditionally the lesser developed nations have depended on export of raw materials and labor cost arbitrage. You can still build a computer more cheaply in India than in San Francisco and South African chrome, indonesian rubber jamaican bauxite still live or die with the general state of global industrial demand. Other things have changed however.

The less established political and legal framework of these erstwhile backwaters has long been an impediment to structural stability of the likes of the U.S., Europe and Japan. But now the history of IMF life support to nations in fiscal and monetary disarray is no longer the standard. It is now the developed nations which are looking like banana republics with unfunded spending and economic policies that seem set upon shifting sand.

The compelling demographics have been clearly visible for many years. The populations of the underdeveloped nations are younger and growing richer even if only by living standards much lower than our own. But the man who buys one refrigerator after a life of none or increases his caloric intake from subsistence levels to a healthier diet is of increasing global impact.

The financial data coming out of the IMF regarding the emerging markets is compelling, particularly when put next to that of the developed economy.

While we in the "industrial" economies groan under current account deficits the IMF reports the emerging markets had a current account surplus of $355 billion, forecast to grow to $550 billion this year. The developed markets have a deficit of $262 billion forecast to decline to $161 billion in 2010.

Emerging markets had GDP growth of 1.7% in 2009 and forecast to increase to 5.1% in 2010. Advanced economies had GDP contraction of 3.4% in 2009 forecast to grow 1.3% in 2010.

Emerging nations had gross national savings rates of 33% in 2009 while developed nations had aggregate savings of 17% in 2009.

The combination of cyclical and secular factors indicate a comfort with an increased allocation to emerging market is warranted including fixed income instruments. The inflation rates of emerging markets have long been where the wheels fell off. While forecast inflation in the aggregate emerging markets is higher than in the developed nations where deflation has taken hold, higher but declining inflation as forecast would not threaten bondholders excessively.

John Barnyak