Notes from The Emerging Markets Forum 2018
The Emerging Markets Forum brought together five leading asset managers, for in-depth discussions on the key dynamics at play within the asset class. Following a difficult year for emerging markets, many of the platform speakers and panellists suggested that the case for emerging markets was as strong as ever.
Key highlights included:
James Kynge, EM Editor at the Financial Times
James said it was a fascinating time to be talking about emerging markets (EM). There are a lot of diverse themes have buffeted sentiment and it is difficult to disentangle them. We are in a phase of ‘post reason’, which is less to do with economics and more to do with politics. He believes that if emerging market investors had to devise a wish list it would include: more stimulus from China; a resolution to the trade war; a sign that the US Federal Reserve might pause rate rises; more orthodoxy in Turkey; a sensible plan to tackle Brazil’s fiscal problems; a decision in Delhi to stop attacking the Reserve Bank of India. The ‘if only’ sentiment in EM is stronger than it has been in decades because EM assets are very cheap. If these come through, there could be a significant shift in sentiment and a big rise in prices.
The Fed and China are the most important elements. In a recent visit to China, James found more bearishness among ordinary people, economists and policymakers. This is a good sign, meaning we are highly likely to see measures to improve people’s lot, such as recent measures to help rural China. On the trade war, there is no way Beijing will allow its economy to buckle to US pressure on the grounds of national pride. The capital account is under tight control and it is difficult to get money out of China. Nevertheless, they may have underestimated Trump and be willing to compromise on some issues.
James believes the dynamics of EM crises have changed – the number has reduced, the countries have better governance, currency pegs have been abandoned, inflation is (largely) under control, fiscal policy is more disciplined, and there is more debt in local currency. Resilience may be stronger in EM than investors expect.
Clint Laurent, Global Demographics
Clint argued there is a degree of continuity to demographic data that allows it to be predicted with some confidence. The growth in GDP comes from a number of key variables: Working age population – if the number of people working is growing, GDP should grow. Education – data is readily available for this: we know how many kids entering primary school in Nigeria, for example. Finally, the propensity to be in employment, which is driven by social attitudes and education; accumulated fixed capital investment per worker – the ‘tools’ for each worker – is also important.
For EM, the working age population grew by 20% in last decade and is likely to be a little slower over next decade, at 12%. Countries can be victims of emigration, so it is important to be on the right side of growth. EM is seeing really strong growth in people who are employed. In China, the working age population is in decline, but this is mostly rural workers. The urban working population is still going up and has 3x the productivity of rural workers.
Clint said, based on demographics, Nigeria, the Philippines, India, Turkey and Bangladesh all show strong growth. Demographics is predictive, but not totally. It is just some parameters to put around investment
Peter Frankopan, Professor of Global History, Oxford University
Peter said the pace of economic change is accelerating and connectivity allows for faster change. However, it is not the first time in history this has happened – the process of replacement is constant. The process of change and evolution is bounded to much deeper trends. It’s about long-term control of resources, demographics, climate.
The region between Turkey and China is home to fossil fuels, rare earths for clean tech, wheat and other natural resources. It grows 80% of world’s rice and holds 60% of the world’s population. Until 1500, this part of the world led in terms of exchange, technologies, sciences, commerce. All the major religions come from there as well. What changed was the discovery of new trade routes – the Americas. Europeans building bigger ships, which helped realign power towards Europe. As such, is this a new world rising? Or a reversion to something more normal?
There has been a significant change over the past 25 years. The global share of GDP has switch dramatically to EM and there is the expectation that this will continue to grow. Asia is becoming richer and richer. Peter said we have to change our world view and recognise that. Of the fastest growing economies, not a single one is in the Western Hemisphere. Peter sees an enormous kick back to this shift. This is seen in Trump and Brexit. People are trying to slow down change - how can they hold back China, the Middle East? He believes the most important question of the next decade will be how to engineer solutions that will allow people to work together.
For more views and interviews with our boardroom speakers, click here and visit the post-event website.