Emerging Market On Its Waves

Musical accompaniment of emerging markets in recent weeks has become much less pleasant. Those investors, who a few months ago could not enjoy India and China, now fell out with tender feelings toward Japan and to a lesser extent, the U.S. and the UK.


A week ago, the GDP data in China have shown how a glass that is half full, can also be half empty. Motor recovery of the world may be about to cause inflation jump. Markets can absorb all available information, but investors do not seem able to simultaneously hold in your mind more than one thought. The effect of herd underscores how investors tend to think in binary terms - either developing or industrialized, risk or risk free. But this distinction is useless, at least for three reasons. It is meaningless because it does not take into account the diversity of what we now call emerging markets. In terms of economic governance, demographics, human capital development through education and health, the initial level of per capita income, these markets are not comparable. It is also useless, because there is no proven link between economic growth and efficiency invesittsy. Finally, it is useless, because generally people do not invest in major indices (although, obviously, can), and in some companies, for which macro-economic or market conditions - just one of many influencing factors.

Analysts at HSBC have tried to draw a map of how the economic world will look like in 2050. Findings favor the bullish scenario for investments in emerging markets - are projected over the next forty years, the developing world will provide two-thirds of world output tripled. As always with a very long-term forecasts, these are designed to impress. For example, it is expected that India's population by 2050 will reach an astounding figures 1.6 million people, exceeding China's 200 million people. According to forecasts, the number of employees in Saudi Arabia will increase by 73%, while in Japan, by contrast, will decrease by 37%. GDP per capita in China increased seven-fold, but in the UK, Australia and even in Switzerland, will double in real terms, adjusted for inflation. Even after this increase, per capita income in China will still be only a third of this figure in the U.S.. America will continue to be the safest and the second largest economy in the world with a production volume is three times higher than in India, despite the fact that the U.S. population will be only a quarter of India's population.

The problem with these stunning megatrends is that, although they are useful in the general context of investment performance, they can not help in making correct decisions. Efficiency of investments is only partially dependent on economic growth and demographics. Are critical expectations and assessment. As an extreme example, a slight improvement in the prognosis of the Congo can make this state better target for investment than China, if the expectations regarding the first country too gloomy, and for a second - quite bright. The selection of markets is similar to the selection of shares - is important extent to which performance exceeds or falls short of expectations, rather than the absolute level of efficiency. John Maynard Keynes likened this aspect of the investment with beauty contests. As investors, we do not judge, whether the participant is beautiful, and appreciate, did so the other judges - the growth of Indian economy seems to be rather appealing, but the income will be those who properly appreciate, whether it improves or worsens, more or less rapidly than forecast all others. Unfortunately, to do it much more difficult than to estimate the growth itself.

Thus, I'm more worried not about whether economic growth in China, India or Turkey in the medium term is higher than in France or Germany, but about whether a sufficient extent the price I paid for this growth, protect me on the likelihood that it will not happen. Almost exactly the result will be different from expected, as found by those who extrapolated the growth of the Japanese in the late 80's. At first glance, this is a good argument to appeal to unpopular market with low expectations. As destroyed stocks, these markets may not be disheartened when a bad news, while markets with high growth rates that China has demonstrated, can fall even when a minor concern. But it's too easy. The reality is that the fast-growing large market is likely to be more fertile hunting ground for the type of actions for sustainable growth, which over time alter the value of the portfolio. Musical accompaniment is sometimes better off.