In a recent note (through an article at the Financial Times), Arcus Research’s Peter Tasker made an elaborate case for the slowing of emerging market investments in the coming years. He says that the relaxation of policy and economy stimulus efforts by the EM central banks to trigger the next emerging markets boom will not work because “this is not a conventional cycle.” The summary of his three points below…
It’s hard to re-inflate bubbles
In the other major emerging economies, the equity market and real estate bubbles have been simultaneous rather than, as with China, consecutive.
Our comment: making a Brazilian analogy for his last sentence above makes sense considering that both the stock market and real estate in Brazil have been inflating simultaneously since 2007.
Political and governance risk
The China Reverse Takeover Index … low valuations… reflects unease triggered by China Forestry and other debacles. A wider loss of confidence could lead to entire markets suffering similar deratings.
EMs don’t offer investors attractive ROI
… supply-and-demand balance for equity itself… the world faces a cumulative shortfall in demand for equities relative to supply of some twelve trillion dollars over the current decade. This “equity gap” is almost entirely a phenomenon of the emerging world, which will experience a cascade of equity issuance to finance future growth, but lacks the indigenous equity capital to absorb it.
The notion that investors in the mature economies will automatically gravitate to the high-growth of the emerging world owes more to marketing than empirical research.
… rapid growth does not benefit existing shareholders if it requires equally rapid expansion of the capital base.
Our comment: Petrobras, anyone?
After the Asian crisis of the late 1990s, the stock markets of the emerging world were cheap and under-owned and their currencies were super-competitive. The turbo-charged ride of the past decade has left them over-owned and bubbly, while their competitive advantage has been eroded by inflation and currency appreciation. It will take another crisis before they become as compelling again.