For most of the past decade, investors have deemed emerging markets (EM) "the best thing since sliced bread", says Jan Dehn of Ashmore Investment Management. But now the fashion has faded. EM stocks have underperformed global ones in the past 18 months or so. The problem? It's become increasingly clear that the "main driving factors behind EMs' great decade" are "unrepeatable" and have "played themselves out", says John Authers in the Financial Times.
The Brics are crumbling
Without the prop of rising commodity prices, underlying structural problems in the Brics have been exposed. Russia and Brazil are growing at just 2.5% a year. Brazil's households have borrowed heavily to finance consumption in recent years, while stubborn inflation, pervasive red tape, and a lack of investment has hampered growth. In India, reforms are progressing slowly, but inflation is stubborn and government overspending has crowded out investment. Growth has fallen from near-double digits to an annual pace of 5%.
EMs as a whole are expected to grow by 5% this year. That's the slowest rate in a decade, barring the 2009 slump when the rich world collapsed. Non-Bric EMs continue to grow strongly, but they are much smaller than the Brics and are starting from a higher base, so there is less scope for rapid growth spurts to catch up with the rich world. So this looks like the end of an era for EMs.
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and global liquidity is set to fall
Is it time to buy?
What's more, adds Alex Frangos in The Wall Street Journal, developing economies are more resilient to potential crises caused by money fleeing from risk these days. There's less debt denominated in foreign currencies (this can be a problem because the cost of servicing such debt rises when investors panic and rush back to developed assets, and emerging currencies weaken). Governments have amassed "mountains of foreign exchange reserves".
Finally, the darker outlook looks to be in the price. EMs as a whole are on a cyclically-adjusted price-to-earnings (p/e) ratio of 13, down from 30 in 2007. Russia, China and Brazil are on single-digit p/es. It's time to start eyeing them up again.
