Daily Management Review

Emerging Economies Going Downhill Fast, say Economists in Davos


Emerging Economies Going Downhill Fast, say Economists in Davos
As once-booming economies appear trapped in a slow-bleeding cycle of weak growth and investment, more than a trillion dollars of investment flows has fled emerging markets over the past 18 months but the exodus may not even be halfway done and leaders gathering for this year's World Economic Forum in Davos in the Swiss Alps are fearful that this episode is much harder to shake off.
With several currency and debt cataclysms infecting all emerging markets in waves over recent decades, the developing economies are no stranger to financial crises.
There's growing anxiety that there will be no sharp rebound at the end of this downturn to reward investors who braved out the worst moments, seeded by fears of tighter U.S. credit and a rising U.S. dollar, and coming alongside a secular slowdown of China's economy and an implosion of the related commodity 'supercycle'.
"The global backdrop and the drivers for emerging markets are very different from 2001," David Spegel, head of emerging markets at ICBC Standard Bank said. Spegel was referring to the time Asia, Russia and Brazil were recovering from the crisis waves of the late-1990s.
"Back then all the stars were aligned for globalization and emerging markets benefited the most. This time around, we just don't have those multiple catalysts," Spegel added.
According to the WTO, a United Nations body, global trade in fact likely grew slower than the world economy for the fourth straight year in 2015. This is in sharp contrast to previous decades when commerce expanded at least twice as fast as world growth.
The China effect was possibly a once-in-a-lifetime shift, whose effects are now dissipating forever is the gloomy conclusion that some are reaching at.
"Rather than expecting emerging markets to mean-revert toward the golden years of 2002-2007, there is a risk that in terms of trade, what we are reverting to is the environment of 1980s," UBS strategist Manik Narain said.
According to the Washington DC-based Institute of International Finance net inflows in 2001-2011 totaled nearly $3 trillion and most of this extraordinary amount of capital had poured into the developing world. this was one of the features of the "golden years" of world economy.
However, the IIF which predicts more flight in 2016 say that some of this is starting to reverse as last year saw the first net capital outflow since 1988, a $540 billion loss.
Nearly a trillion dollars have fled China alone since mid-2014, recons other forecasters such as JPMorgan. China’s central bank reserves alone declined more than $500 billion last year.
However the world financial experts see some bright spots such as India and Mexico. However, investment returns across the sector are unlikely to recover soon, many fear, with China fears on the rise and Brazil and Russia in recession for the second straight year.
Morgan Stanley has calculated that corporate earnings have shrunk for more than four years and emerging stock market performance has lagged developed peers for five years now.
The strengthening dollar is spooking investors in emerging currency bonds too, notes Richard House, the head of EM debt at Standard Life Investments.
"Fund performance hasn't been good across the industry...Local market funds have been an outflow asset class for a while and that experience is going to impact people's mindset going forward," House said.