January 2012
Three reasons emerging markets may be stronger than
developed markets
James Carlen, CFA, Sector Manager
Emerging markets (EM) have been in the spotlight over
the last few years as the so-called BRIC countries (Brazil,
Russia, India and China) have been hailed as the new
epicenter of global vitality. This has driven a surge of
interest in EM investments and a massive shift of capital
into these countries. Unlike the 1990s, when EM were
more hype than reality, this time, the focus on EM is based
on strong performance, not rosy projections.
Most EM countries came out of the 2008 crisis largely
unscathed, looking stronger than many developed market
(DM) economies did five years ago. In 2011, EM
economies were forecast to compose about 50% of the
global economy and contribute 80% of incremental world
economic growth, according to the International Monetary
Fund (IMF). Rising trade flows, accelerating capital inflows
and several years of strong commodity prices have pushed
up EM growth rates.
Because of this windfall of better economic performance,
most EM countries have reduced budget deficits and
“grown out” of their public debt. Equally important, pension
reforms helped them to develop local capital markets,
allowing them to self-finance more of their own economic
growth. Funding in their own currencies reduced their
vulnerability to shifts in exchange rates or disruptions in
global capital markets.
EM economies offer investors three important attributes
not found in developed markets:
1. Better growth dynamics
Over the last three years (2009–2011) (IMF), emerging
markets have been growing at robust rates (4.95% on
average), while developed markets have barely grown at
all (0.25%). Asia has led the charge, with Latin America
also growing at a solid rate, benefiting from strong
commodity demand out of Asia and rising domestic
demand. EM economies are expected to decelerate in
2012, due to capacity constraints as well as slower DM
growth, which will result in lower export demand and
decelerating capital inflows.
The IMF World Economic Outlook forecasts EM growth of
6.4% in 2011 and 6.1% in 2012 (vs. 7.3% in 2010). By
contrast, the forecasts for DM growth are 1.6% and 1.9%
in 2011 and 2012, respectively (down from 3.1% in 2010).
So while EM economies may be growing modestly slower in
2012, growth remains robust compared with the anemic
DM growth rates.
Emerging market growth dynamics have also improved.
EM trade now makes up nearly 35% of world trade (IMF),
and an increasing proportion of it is intra-EM trade. For
example, Latin American exports to China have more than
doubled since 2005 and, in a rising number of countries,
outpace exports to the United States. Average EM gross
domestic product (GDP) per capita has tripled in the last
20 years to nearly $6,000, and EM consumers collectively
now spend more than Americans, making up nearly 34% of
global consumer spending. With credit penetration and
domestic demand still relatively underdeveloped, there is
still considerable growth upside just from the natural
maturation process.
percent of GDP rose about 22% from 2007–2010, while
it rose only about 2% among the EM governments. This
debt growth differential continued in 2011.
Exhibit 2: Emerging markets are now half of the world
economy and contribute about 80% of incremental
global growth
Country contributions to global GDP growth1
6
5
4
3
2
1
0
-1
-2
-3
Exhibit 1: Emerging markets have less debt than
developed markets
120
Public Debt
100
Advanced
economies
2005
2007
2009
2011
2013
2015
2016
GDP purchasing-power-parity (PPP) share in world GDP, 20112
80
G7
60
■ India
■ China
■ Other emerging and
developing economies
■ Advanced economies
World
40
Emerging and
developing economies
20
0
1950
1960
1970
1980
1990
2000
Source: IMF World Economic Outlook, September 2011
1
Shaded area indicates IMF staff projections. Aggregates are
computed on the basis of PPP weights.
2
Based on 2007 PPP weights.
2010 2016
Source: IMF World Economic Outlook, September 2011
2. Stronger balance sheets
Not only is EM growth faster and more dynamic, but EM
economies possess much better balance sheets than their
DM counterparts. Public sector debt in the developed
markets averaged about 98% of GDP in 2010, versus 34%
of GDP in the EM economies (IMF). The debt dynamic is
even more telling. Developed market public debt as a
The public debt that EM countries hold is also better
structured. With the development of local pension funds
and domestic capital markets, EM governments rely
increasingly on their own debt markets for their funding
needs. In most of the major Latin and Asian EM economies,
local debt makes up more than half of the consolidated
public sector debt. After factoring in international reserves
and sovereign wealth fund balances, many of these
countries have only very modest net external debt. It is
worth noting that EM central banks possess four out of
the five largest stocks of international reserves.
The ratings agencies have recognized the secular
improvement in creditworthiness among EM countries,
and have raised their average credit ratings from BB to
BBB over the last six years. The credit ratings typically
range from AAA (highest) to D (lowest) and are subject
to change.
of the previous decade. EM economies have better growth
potential going forward, are better credit risks and have
more policy options for mitigating the crisis shock waves
from the developed world. In our view, they represent a
better investment destination than many of their developed
market counterparts.
3. Greater policy flexibility
In contrast to the 1990s, most of the risks affecting the
global economy over the last few years are centered
outside of the emerging markets. These include EU
peripheral country debt and banking sector issues, fiscal
policy uncertainty in the U.S. and the anemic rate of DM
growth. On the surface, these factors present real risks to
EM growth by potentially disrupting export markets,
commodity demand and capital inflows. However, unlike the
U.S., EU or most of the G-7, EM central banks and fiscal
officials generally find themselves with many tools to
moderate market volatility and growth contagion emanating
from DM markets. For example:
> Most EM central bank reserves are at record levels,
fiscal deficits are generally manageable, public debt is at
historic lows, and monetary policy, in most cases, has
been on a tightening trend.
> EM governments are on average about 10 percentage
points smaller (as a portion of the overall economy) than
average DM countries and, therefore, have some room to
grow through stimulus measures if necessary.
> Most EM central banks have significant reserves
available to reduce foreign exchange volatility and room
to cut rates to stimulate growth.
Emerging markets have been spectators to the series of
financial crises buffeting the global economy over the last
four years. They have continued to grow and develop, while
developed market economies expend their energy and
wealth cleaning up after the financial and policy excesses
Investments in foreign securities involve certain risks not associated with investments in U.S. companies, due to political, regulatory, economic, social
and other conditions or events occurring in the country, as well as fluctuations in currency and the risks associated with less developed custody and
settlement practices. Risks are particularly significant in emerging markets.
Investments in emerging markets present greater risk of loss than a typical foreign security investment. Because of the less developed markets and
economics and less mature governments and governmental institutions, the risks of investing in foreign securities can be intensified in the case of
investments in issuers organized, domiciled or doing business in emerging markets.
Important disclosures
The views expressed are as of the date given, may change
as market or other conditions change, and may differ
from views expressed by other Columbia Management
Investment Advisers, LLC (CMIA) associates or affiliates.
Actual investments or investment decisions made by CMIA
and its affiliates, whether for its own account or on behalf
of clients, will not necessarily reflect the views expressed.
This information is not intended to provide investment
advice and does not account for individual investor
circumstances. Investment decisions should always be
made based on an investor’s specific financial needs,
objectives, goals, time horizon and risk tolerance. Asset
classes described may not be suitable for all investors.
Past performance does not guarantee future results and
no forecast should be considered a guarantee either.
Since economic and market conditions change frequently,
there can be no assurance that the trends described here
will continue or that the forecasts are accurate.
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Investment Distributors, Inc., member FINRA. Advisory
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Advisers, LLC.
Investment products are not federally or FDIC-insured,
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