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| Tuesday, 23 March 2004 |
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Where to find prosperity The global recovery is oddly joyless in big markets, newly confident in emerging ones The world's major economies are picking up, and 2004 looks likely to be the best growth year for the United States since the tech bubble burst. There are signs that Japan and Germany may finally be turning the corner after years of sluggishness. Yet doubt still hangs over the big economies like a cloud, producing an increasingly joyless recovery. As global chieftains gather this week at the World Economic Forum in Davos to mull over the theme of prosperity and security, they are finding that prosperity is returning outside the major markets, in places such as China, Southeast Asia and even parts of Latin America and Africa. There is still plenty of talk of bubbles and overheating in some emerging markets, but not all markets are created equal, and a pack of bulls believes a new golden age is galling on these countries as a whole. "This is turning out to be the best period for emerging markets since 1993," says Ruchir Sharma, co-head of global emerging markets at Morgan Stanley. The economic forecasters back up the bulls. Southeast Asia is predicted to grow faster than 6 percent, Russia and Poland more than 5 percent, Africa better than 4 percent, and even beleaguered Latin America is expected to rise above 3 percent. According to Global Insight's research, the growth rebound will be most dramatic in current or former pariah economies: Venezuela will snap back from a 10 percent recession in 2003 to top 5 percent this year, and growth in war-torn Iraq will jump from negative 21.2 percent to a positive 39.7 percent. Investors are putting their money where the growth is. A report released last week by the fund researcher Emerging Portfolio-.com showed that 2003 was a record year for inflows into equity and fixed-income funds focusing on emerging markets. The new year is off to an equally strong start, with $350.4 million of new money going to emerging markets in the first week of 2004 alone. Indeed the new passion for the farflung inspired a warning last week from the Institute of International Finance (IIF), which represents big banks and investment firms. Officials of the group said emerging-market asset prices appeared to be "moving ahead of fundamentals, as was the case in 1997 before the Asian financial crisis." So why are investors running back to Thailand and South Korea when the United States is forecast to grow a healthy 4 percent? "As strong as the US is going to be, a number of key emerging markets will grow even faster," says Nariman Behravesh, chief economist for Global Insight. The growth is driven by the global up-turn, but also by the mini-locomotive effect of Asia, and in particular China, which accounted for 13 percent of global economic growth last year. While Chinese exports have been growing about 30 percent per year, its imports have grown even faster, about 40 percent last year. China buys between 20 and 25 percent of the globally traded volume of many key commodities, such as iron ore. This has boosted exports and raised growth prospects for many emerging nations that rely on commodity exports. Asia, led by China, is now the major consumer of Nigerian oil, boosting prosperity in West Africa. The Chinese are snapping up soy in Brazil, copper in Chile and timber and metals in Southeast Asia and Africa. "In economic terms, China is coming to occupy the same space in emerging markets that the US occupies in the larger world," says Sharma. The Indonesians are expected to lose 150,000 jobs to China this year in textile alone, yet they are also expected to see GNP growth jump from 3.8 percent last year to 5 percent in 2004, in part due to Chinese demand for Indonesian petroleum products, palm oil and rubber. Of course, China won't have a net positive effect in every market. Oil-importing countries such as South Africa could suffer as Chinese demand pushes up commodity prices, forcing them to pay heftier energy bills. South Africa's strong European trade links could also be a liability as the euro value remains high. The same is true for other African countries like Chad and Cote d'Ivoire with currencies linked to the euro. Even the optimists are picking with care. Merril Lynch released a report earlier this month recommending numerous emerging-market plays, like Indian banking stocks and Thai construction and telecom equities. The thinking is that emerging stocks are still trading at a 35 percent discount to stocks in New York or Tokyo, and they started so low that there's still plenty of room for improvement. It's best to remember that emerging markets are a mixed bag. While the IIF cited markets like Poland, the Philippines and Venezuela as overpriced bets on weak debtors, investors have faith in reform elsewhere. "We had seen some reform fatigue in the late 1990s," says Merrill Lynch emerging-market strategist Tulio Vera. "But as the economy has picked up, countries are more able and willing to kick-start new efforts." Courtesy Newsweek |
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