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EM: where to take refuge from a global slowdown in growth

Concerns about global growth have placed stock markets under considerable pressure in recent weeks. In the knowledge that leading indicators have peaked and that the euro crisis is set to continue, we must note that the environment for stock markets in the emerging world is not very favourable. The strong economic momentum in both the developed and emerging world will probably weaken in the coming months. Increasing cyclical adversity and a widespread awareness among investors that budget policy can no longer be expansive following the escalation of the euro crisis in April will keep markets under pressure for the time being. Normally speaking, the strong correction of stock markets around the high in leading indicators is an indication that a sharp downturn in economic growth is expected. Due to the fragile banking system in the US and Europe and the urgent need to regain control of public spending throughout the developed world, it is likely that forecasts of economic growth will be sharply adjusted as soon as the economic momentum starts to weaken.

The outlook for growth in emerging economies is far better than the one for developed markets, also in a time of slowing worldwide growth. China, the most important emerging market, remains the world’s most solid driver of growth. The country has sufficient financial reserves to offset a potential slowdown in export growth through additional domestic investments and consumption. In the rest of the emerging world, an increasing number of countries are very successfully shifting the focus of their exports from the US and Europe to China and other emerging markets. Exporters of commodities and countries that export capital goods are relatively well placed to limit the damage of a new slowdown in growth in developed markets. These countries are benefiting from the strong growth in Chinese investment, which the authorities in Beijing wish to maintain at a level above 20%.

The best positioned markets are those in which domestic growth is strong and sustainable even in times of sluggish global growth. Markets like Indonesia, Egypt, China, India and Oman will most likely be able to maintain high rates of growth during a slowdown in world trade. Strong population increase and labour market growth, low credit penetration, a sound reforming momentum and a healthy balance of payments are the characteristics that make growth in these markets relatively immune to stagnation in the US and Europe. This is why it is important for investors in emerging markets to shift their exposure to markets in these categories to the greatest extent possible. At the same time, it would be prudent to limit exposure to markets driven primarily by growth in exports to the US and Europe as much as possible. Markets like Taiwan, Malaysia and Korea belong to this latter category. In addition, Hungary, Poland and Turkey will be vulnerable if growth forecasts for the eurozone are further adjusted downwards.

Maarten-Jan Bakkum is Global Emerging Markets Equity Strategist at ING Investment Management Europe.

The information contained in this column cannot be understood as provision of investment services or advice.