By now it should be clear that the “de-coupling” of the global economy, far from the whimsy of radical salon economists, is an established fact. While the US and other developed economies have struggled to arrest hair-curling declines in output, emerging markets from China to Latin America are enjoying an onslaught of investment on the not-unsound wager that for them at least, the worst of the economic crisis is over.
Since the start of the year, the FTSE emerging markets index has risen 41.1 percent and nearly 70 percent since the beginning of March. Compare that to the FTSE All World developed markets index, which has risen by 7.2 percent and 31.4 percent during the same periods. On the bond side, listed companies from developing economies raised $7.1 billion in April, compared with $5.9 billion for the entire first quarter, a clear sign that credit markets in the non-industrialized world are loosening and corporations are happily rolling over their debt obligations. In May, oil giant China National Petroleum Corp. became China’s first non-financial company to issue a dollar-denominated corporate bond, which gives local investors an option to buy foreign-currency debt issued domestically, which these days is considered a safer bet than buying paper floated by US corporations.
Large, blue-chip companies dominate the emerging market rally – Brazilian commodities producers, Indonesian pulp manufacturers, Chinese construction firms, and South Korean steel makers. Relatively cheap valuations – shares on the booming Turkish and Russian stock markets, for example, are trading at single-digit multiples – suggests this is no mere cyclical uptick. Rather, the rush to emerging markets is symptomatic of a structural shift that has been evolving with tectonic deliberation for two decades: the dissolution of a US-dominated global economy into a cluster of regional trading blocs, such as the much-celebrated “New Silk Road” linking China and the Middle East.
The evolution of a multi-polar global economy will take time to solidify, analysts caution. America is still the world’s largest economy by several orders of magnitude, and should it lurch into a double-dipped recession all bets are off. Yet the very fact that emerging markets are forecast to achieve average growth of 4.5 percent this year, according to the World Bank, compared to an expected contraction of 0.1 percent among industrialized nations, suggests that “decoupling” has arrived. Consider the lackluster appetite for American sovereign debt. The yield on US Treasury bills, which only a few months ago were considered the world’s only safe investment, has been rising dramatically largely because traders are prepared to accept high risk for greater rewards offered elsewhere, mostly in emerging markets. In a May report, HSBC anticipated a decoupling of the global economy’s slow-growth core and a high-growth periphery that “should allow for a particularly strong EM equity performance.” Morgan Stanley, in an April 22 comment, goes so far as to hail “the ‘painful birth’ of the EM-centric global economy.”
At a summit meeting attended this week in the Russian city of Yekaterinburg by the leaders of Brazil, Russia, India, and China – the so-called “Bric” nations that account for 40 percent of the world’s population and 15 percent of its wealth – Russian President Dmitry Medvedev, called for a “fairer global economic order” and described the talks as “the epicenter of world politics.” While that may have been overstating things a bit, the trends clearly favor the developing world. Emerging markets’ share of global economic output is forecast to reach 35 percent in 2010, up from only 20 percent a decade ago, while the US share, currently at about 23 percent, has been declining gradually since 2003. The weighting of emerging markets in the Morgan Stanley All Country World Index stands at 13 percent, up from 2 percent in 1988.
The concentration of foreign exchange reserves in the developing world – the wages of their export-driven growth model – has provided them with shelter from a global credit crunch that crippled the world’s highly indebted mature economies. Now, faced with weak demand for their goods in America and Europe, emerging markets are investing their savings in stimulus packages that are invigorating domestic consumption and capital investment. Witness, for example, the skyrocketing growth in China of new loans, factory output, and auto sales. In the Middle East, greater inter-regional trade has helped to offset the impact of lower export demand from the US and Europe. Ditto Latin America. As Mark Mobius wrote in the Financial Times last week to mark the twentieth anniversary of his landmark Templeton Emerging Markets investment Trust, “one of Latin America’s main attractions is its huge consumer market, with pent-up demand for goods and services, and world-class companies that are…under leveraged and inexpensive.”
Asked why he robbed banks, famed American thief Willie Sutton replied “because that’s where the money is.” Similarly, wise investors converge on the most liquid markets when the rest of the globe is cash-poor. If the developing world is attracting investment riches at the expense of the US and other debt-heavy nations – and in so doing creating new centers of gravity for the global economy – they are also helping to sustain a fragile recovery worldwide that will buy time for the West to finally balance its books.
Stephen Glain - Washington based journalist and author specialising in Asia and the Middle East.
