Emerging market olympic champions
Citius – Altius – Fortius; Faster – Higher – Stronger
In the past, the Olympic motto might easily have been used to describe certain emerging markets, whose faster levels of growth, higher rates of return and stronger economic fundamentals were once seen as an antidote to the travails afflicting the developed world.
Of late, a more fitting motto might be Tardior – Inferior – Infirmior; Slower – Lower – Weaker, as vast swathes of the emerging world have succumbed to the bursting of the commodity bubble, a prolonged period of under-investment and continued capital misallocation.
However, classifying emerging markets homogenously is as irrational as implying the economic profiles of Germany and Greece are identical because they are both in Europe! While emerging markets as a whole may struggle to excel in the Olympiad of financial markets, at Canaccord Genuity Wealth Management we have sought to identify those countries which could still be viewed as potential medal winners in the marathon which is economic development.
Gold medal: India
If India enacts the necessary structural reforms – and on the assumption that the macro-economic environment is navigated successfully – it is entirely possible that real growth in the economy could reach double digits in the next few years. India is already the world’s fastest growing large economy with year-on-year growth reaching 7.9% in the first quarter of 2016. With a population of c.1.3 billion, the second most populous country in the world still only has a GDP per capita in-line with China’s readings of the early 2000s, according to data from the IMF. The economy, therefore, has considerable scope for further expansion.
To realise this potential, much will depend on Prime Minister Narendra Modi successfully driving through economic and structural reforms. While progress has not been as swift as some would have hoped, the recent reformation of India’s tax system is a potential game changer. Following central government parliamentary approval there is real potential for India’s plethora of state and local taxes to be replaced by one unified goods and services tax in the coming months, turning India into a unified economy for the first time. Many believe that the tax regime was the primary reason why manufacturing contributes just 16% of GDP.
Acting as further tailwinds to an economy that is already performing well, India still has room to ease monetary policy and increase regulatory pressure on banks to formally recognise non-performing loans in order to unblock the country’s credit markets.
Silver medal: Indonesia
While impacted by the growth slowdown in China and the bursting of the commodity bubble, the Indonesian economy has considerable scope to benefit from structural reforms (rather like India).
By reappointing World Bank managing director, Sri Mulyani, as finance minister, hopes have been raised that measures will be taken to boost economic growth and increase the country’s low tax revenues. In addition, policymakers have recently adopted a new financial stability law, while bank regulation is slowly improving.
Over the long term, the Indonesian economy will benefit from a favourable demographic profile which will see the state dependency ratio decline over the next decade – in sharp contrast to much of the rest of the world. From their relatively high level, interest rates have scope to fall, particularly as core inflation is 3.5% – the lowest level since 2008. It is expected that infrastructure improvements should help to contain headline figures moving forward. Finally, with the aim of boosting efficiency and competitiveness through foreign investment, in February, Indonesia announced plans to remove 35 industries from the list of sectors in which foreign investment is constrained.
Ultimately a sustainable growth rate of 7% – 8% should not be beyond the realms of possibility – and in a low growth world, this should not be downplayed.
Bronze medal: Mexico
Mexico’s economy contracted for the first time in three years during the second quarter, but sometimes it is necessary to view progress over the long term. While the economy has recently faced headwinds, including manufacturing weakness in the US, the prospect of a Donald Trump presidency and policy tightening, the economy remains one of the few emerging markets which will potentially grow faster in the next decade than it did in the last.
Mexico’s balance sheet is extremely strong, with debt to GDP standing at a relatively low 48.6% – of which over three-quarters is denominated in peso. Private sector debt is also low, at 20% of GDP. In 2013/2014, the country passed what appear to be deep routed structural reforms and, while further work is needed to improve the nation’s education, police and judicial systems, this is hardly unique to Mexico in an emerging market context.
So too, the unpopularity and whiff of scandal surrounding President Pena Nieto should not disguise the important reforms which were pushed through in the first two years of his presidency. Part of the unpopularity stems from vested interests battling against necessary reforms, particularly in the field of education.
The progress of the economy will not be plain sailing, but the potential for further improvement is evident.
This is a marketing communication under Financial Conduct Authority rules and under the rules/codes of practice of the Guernsey Financial Services Commission, the Isle of Man Financial Services Authority and the Jersey Financial Services Commission.
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IMPORTANT: Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. Past performance is not a reliable indicator of future performance.