Emerging markets will be the winners from this crisis

The recession's over. That's the verdict from the National Institute of Economic and Social Research. And more and more people seem to agree. The Confederation of British Industry has also revised up its outlook for the British economy.

Meanwhile, Barclays has apparently secured its future by selling a chunk of itself to BlackRock. As for the stock market, it's already spoken, rallying sharply since March.

So is that it? Is it all over?

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Is the recession over?

There are plenty more economic worries on the horizon. An immediate worry is the potential for a chain of currency collapses in Eastern Europe, which would give the global financial system another rattle. A little further down the worry list, there are still many problems in the US property market not to mention the small concern that California is near-bankrupt.

These aren't small problems. And while the market may be aware of them, it's all too easily surprised as the events of the last 18 months have proven over and over again. So we think there's every chance that something else will happen to send markets lower in the near future.

But in a way, that's a sideshow. The trouble is that the longer-term outlook for Western economies at least is very shaky indeed.

The financial crisis happened because too many people took on too much debt against collateral that wasn't worth as much as they, or the banks who loaned money to them, thought. Rather than see these malinvestments' wiped out in one fell swoop, which would have been very painful indeed, the world's governments Western governments in particular stepped in with the express aim of propping up asset prices as best they could.

Western governments are storing up huge problems for the future

The way you do that is by devaluing money. Slashing interest rates, printing more of it. Although credit is still hard to come by, the decrease in debt-servicing costs particularly for mortgage holders has certainly helped to ease the impact of the crunch.

But the trouble is, when a government effectively acts as guarantor for the debts of its entire banking system, then the concerns over defaults shift on to that government, rather than the banks.

And when, as is the case in the US and the UK, that government is already heavily indebted, its creditors start to wonder if their money is actually as safe as they thought.

This is already having an impact. As Tim Price of PFP Wealth Management puts it, "government bond markets increasingly look like a grisly road accident in progress. Which is as it should be." In the US, 10-year US Treasury yields have nearly doubled since December, to 3.75%. That's partly because investors are getting over-excited about a recovery', and so other asset classes, such as equities, become more attractive than bonds. But it's also because they're worried that the US government won't be able to repay its debts without resorting to rampant inflation.

So regardless of how rapid or otherwise the recovery is, we face a post-crisis world where the US and the UK are hobbled by huge debts. They will be left facing tough choices on cutting public spending and raising taxes if they want to maintain the faith of the foreign investors who lend them money.

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Why emerging markets will come out on top in this crisis

In the long run, that means the global shift of power from West to East will continue. Last year the developing world for the first time ever consumed more energy than the developed world. No wonder China is out snapping up oil companies and physical stocks of crude spending its dollars while they're still worth something. And Barclays' deal with BlackRock was part-funded by sovereign wealth funds in Singapore and China.

As Price puts it, "the emerging markets have come of age." This "vast region in many respects has better fundamentals than the West: better growth prospects; larger foreign reserves; less sovereign indebtedness; better GDP per capita growth; a stabler banking system; superior household finances and savings rates."

And although rampant growth doesn't always mean good stock market performance, "during this changing of the guard', investors will be hard-pressed to find fundamental reasons to buy knackered ex-growth, largely insolvent economies such as western Europe's, when they can buy healthy, pro-growth solvent economies in the so-called developing' world." You can find out which stocks and funds Tim likes as the best ways to play this shift in his Price Report email newsletter.

In the shorter term, the current rebound in markets does seem vulnerable, and we'd expect another slump ahead which would give better opportunities to get into some of the developing markets. But in the longer run, these markets (and Japan in the developed world) look far better placed than Britain and the US.

In the meantime, defensive stocks with a global customer base, which don't rely too heavily on strong growth look like very good options. As my colleague David Stevenson pointed out the other day (read: The shipping index shows most stocks are heading down), defensive stocks have underperformed the market bounce badly. Now looks a good time to get some exposure see David's piece for more.

And if you want to know how to profit from ongoing turmoil in the markets in the meantime, you should take a moment to learn more about our new newsletter from ex-City trader Riccardo Marzi.

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