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Tuesday, April 14, 2015

All Emerging Markets are Not the Same

I have questioned several times in posts on emerging markets that the "asset class" is not a very useful one as it includes markets with extremely divergent characteristics.

The most important distinction in the emerging markets groups is between Latin American and Asia. Asian economies have strong current accounts positions many of them in surpluses, benefit from lower commodity prices, and have displayed strong economic growth. While the Latin American countries the largest of which are Brazil and Mexico are dependent on commodity exports and have weaker national accounts.

The recent run up in shares in China and Hong Kong has further increased the performance differential between Emerging Asia, total Emerging Market Indices and Latin America.. Over the last  3 years Emerging Asia (ticker GMF) has produced a total return of 36.9%, total emerging markets 11.3% and Latin America (ticker ILF) -28%

Graph below shows growth of $100,000

3 Year Returns Growth of $100,000 Emerging Asia (gold) Overall Emerging Markets (blue) and Latin America (green)

What about the long term future ? A recent bloomberg article reports on longer term projections for global economic growth. The forecasts see a growing share of global GDP for Asia most notably China and India. Other Asian economies are expected to grow strongly while growth in Latin America will remain slow.

Get ready for a new economic order. In the world 15 years from now, the U.S. will be far less dominant, several emerging markets will catapult into prominence, and some of the largest European economies will be slipping behind.  
That's according to the U.S. Department of Agriculture's latest macroeconomic projections that go out to 2030, displayed in the chart below. The U.S. will just barely remain the global leader, with $24.8 trillion in annual output. The gray bar represents the $16.8 trillion gross domestic product projected for 2015, and the green bar shows how much bigger the economy is expected to be 15 years from now. The country, worth 25 percent of the world economy in 2006 and 23 percent in 2015, will see its share decline to 20 percent. 
China's GDP will grow to more than twice its size today, helping the Asian powerhouse to almost entirely close its gap with the U.S. 

India, ranked eighth for 2015, will climb past Brazil, the United Kingdom, France, Germany and Japan to take third place in the world ranking. The International Monetary Fund calls India "the bright spot in the global landscape." The country will have the largest workforce in the world within the next 15 years, the IMF notes, and among the youngest.

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