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Tuesday 7 October 2008

The East powers ahead while America stumbles

Ian Cowie asks whether high-growth economies such as China’s are a safer bet than those of the debt-laden West

Unlike the developed nations and their increasingly distressed debtors, emerging economies have built up massive reserves by supplying many of the goods we’ve been buying on tick. According to analysis by Urban Larson, a director at Foreign & Colonial Investments — which has been investing in emerging markets for more than a century — these countries now hold US$3.5 trillion in foreign currency reserves, rather more than two thirds of the global total.

Depending on how you analyse the figures, emerging markets may also account for slightly more than half of global GDP, yet all the shares on their stock markets comprise less than a quarter of global market capitalisation. At its simplest, the gap between those two figures is the bull case for enthusiasts who believe there is more to come, as valuations in emerging economies catch up with those in more developed countries.

The bears, on the other hand, argue that it’s absurd to imagine anyone can be immune from recession in America, which is still by far the biggest economy in the world. Christian Deseglise, global head of emerging markets at HSBC Investments, sums up the conundrum: ‘Financial analysts are struggling to determine the relevance of the old adage: “When America sneezes, the rest of the world catches a cold.” After five years of strong global growth, largely led by emerging markets, their resilience in the face of a possible American recession is being tested. While they will not escape unscathed from a full-blown recession in the developed world, they’re now in robust shape and, in the event of a mild recession, they should weather the storm and continue their shift to centre-stage in the world economy.’

One reason to believe that process can be sustained is the emergence in many of these countries of a substantial middle class — which also means a domestic mass-consumer market — for the first time. HSBC estimates that while a quarter of the goods and services produced by emerging markets were exported to America at the start of this century, the total is nearer 16 per cent today. Likewise, F&C calculates that exports to America account for only 12 per cent of China’s GDP, 3 per cent of India’s and barely 2 per cent of the economic output of Brazil or Russia.

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