The Xchange Blog

Assessing The Strength Of The Major Emerging Markets

Reports from this year’s G20 Summit in Germany, between leaders of the world’s 20 richest economies paint a picture of global partnerships in growing tension with nationalist and protectionist voices from some of the summit’s most influential member nations. Most worrying is that one of the louder voices within this contingent belongs to the President of the United States.

Additionally, while the International Monetary Fund’s 2017 World Economic Outlook provides an optimistic projection compared to an anemic 2016, its report is also tinged by persistent uncertainty related to the Trump administration’s stated “America First” trade stance.

Couple that with a perennially fraught geopolitical picture and there’s plenty to keep global traders awake at night. One bright spot has been the rally in emerging markets. Although some anticipate a pullback, others see room for a continued bull run. 

Emerging/Developing Markets Price Ratio (1/31/14 – 7/31/2017)

Emerging/Developed Price Ratio – For years, the valuation levels for developed markets (MSCI EAFE Index) have been above historic levels as emerging markets (MSCI Emerging Markets Index) played catch up.  The price ratio shows emerging markets outperforming developed markets in 2016 and so far in 2017.
Source: Bloomberg

Given the questions hanging over the immediate future of global free trade, as well as how these developments might spur or hinder economic growth, it’s worthwhile for global equity traders to look at the current state of four of the world’s leading emerging markets for signs of resilience or evidence of instability. 

 

China

Much like the U.S, China’s economy has been in a pattern of middling growth interspersed with brief spurts of productivity. In recent months, this trend has manifested in an upswing in China’s manufacturing PMI by one to two points above the benchmark.

However, continued friction between the country and the U.S. over China’s support of North Korea, as well as economists’ continued predictions that it is in for a slowdown, could leave the world’s second-largest economy vulnerable to international volatility.

 

India

If China is in for a sanguine period economic period, then India is projected to be the new heart of growth among the global emerging markets. Over the previous fiscal year, India’s GDP grew by 7 percent, eclipsed only by its 8 percent growth in 2015. Further, a 2017 Harvard study projects India’s GDP will continue to grow at a clip of more than 7 percent through at least 2025.

This sustained performance all comes at a time of low inflation, low interest rates and massive monetary reforms in the country that have aimed to curb corruption and improve banking habits among the population. Trade-wise, India’s relations with the U.S., like most other nations, have been a point of contention by President Trump. When he recently hosted Indian prime minister Narendra Modi, Trump pointed to the $31 billion deficit running between the U.S. and India. However, India’s diversified trade partnerships across the globe stand to grow substantially if the country’s economic development is used effectively.

 

Brazil

Brazil’s economy has faced some headwinds in recent months, not the least of which is due to political and cultural instability in the region and within the nation itself. Poverty and corruption have hindered Brazil’s performance as an emerging market, and the country’s nearly non-existent GDP growth stands as continuing evidence of these hurdles.

While Brazil is working under a growing trade surplus that has allowed the country to generate liquidity, the political and social difficulties faced by the nation will likely only compound if global trade tightens in the coming years.

 

Mexico

More than any other country on this list, Mexico might feel the greatest impact from any changes to U.S. trade policy. President Trump has been vocal on his disdain for NAFTA, and Mexico has already been forced to raise interest rates to their highest level in history to combat inflation from a Peso that lost much of its value following the election.

However, things are not all bad for Mexico. Credit Suisse projected Mexico’s GDP will increase from 1.7 percent to 2.4 percent in 2017, and recent discussions between President Trump and President Enrique Peña Nieto have fostered some agreement over the question of NAFTA. Beyond opportunities on the continent, Mexico is also actively seeking other potential trade partners, you know, just in case.

As the IMF indicated, and as should be apparent by now, the outlook is essentially entirely mixed among the emerging markets. What transpires next within the economies of the above-mentioned countries, or in Singapore, or Argentina or any other fast developing nation that surges forward in the next few years will occur as a result of dozens of disparate political, economic and unforeseen factors.

 

Bottom line: Current geopolitical trends seem to suggest that trade will play an outsized role in determining those countries that will capture, retain, or lose relevance on the global stage. So if investors keep their attention on any one thing, let it be trade.

 

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