If emerging markets are currently not the global engine, who is?

After a year of disappointing economic growth rates in emerging markets, many economists are saying that these countries, especially the major ones—Brazil, Russia, India, China and South Africa (BRICS)—have faded as an engine of global recovery. According to some analysts, the emerging countries, except for China, have been struggling to grow and have been facing inflationary pressures. Although it is true to some point, this theory arouses as well an instigating question: if the emerging markets have faded as the global engine, who has been keeping with the global growth? Is it the U.S economy? Or  the eurozone? The answer is: the emerging markets.

The eurozone sovereign debt crisis seems to be under control, though this scenario can change anytime. The European group might have another year of low growth rates in 2013 associated with high unemployment figures, especially in Spain. And this is a problem that the policymakers do not solve rapidly. The Spanish government—as the Portuguese, Greek and Italian ones—will have to cut costs and social benefits, which means less money will be injected into the local economies. Thus, the eurozone might have another year of weak growth.

In the United States, the unemployment rates remain persistent and the U.S. debt problems are critical. “From my vantage point, the uncertainties surrounding the U.S. economy may just be the tip of the iceberg, threatening the global economy in the coming year,” wrote Mark Mobius, who directs the Templeton research team based in 15 global emerging markets offices and manages emerging markets portfolios.

Indeed, the problems over the US budget could restrain the economic growth around the world. According to the World Bank, “the US may fall into recession, posing a greater threat to the world economy than the euro zone crisis which is expected to continue in 2013,” said the institution on its n its Global Economic Prospects report.  The World Bank also said the US economy might grow 1.9% in 2013 due to "fiscal paralysis". The American Congress has to approve the US sovereign debt ceiling above the current USD 16.4-trillion mark.

On the other hand, the emerging markets have been growing at lower rates compared to some years ago, but in general they are still growing more than the developed markets. According to some analysts, the global emerging markets’ GDP might grow 5.1% in 2013 from 4.5% in 2012. China, for instance, might grow 8.1%, which means this will support growth for export-oriented companies in the emerging markets.

According to Mobius, Frankling Templeton’s research team is still generally positive on the long-term prospects for emerging and frontier market equities. “In our opinion, the economic background for many emerging and frontier markets is stronger than that prevailing in many developed markets,” Mobius wrote on his blog. “Although weak growth in developed markets could be transmitted to emerging markets, notably through declines in world trade, this influence could continue to be offset in emerging markets by higher investment spending and increased domestic demand.”

Another important point is that the emerging markets still have room for implementing fiscal and monetary policy. Yesterday, for instance, Brazil’s monetary authority decided to keep the annual basic interest rate in 7.25%—although this is the lowest level ever, the country has ample room to cut this interest rate

According to Mobius, the Chinese economy will have a stronger performance in 2013 compared to 2012. “The authorities will continue to reposition the Chinese economy to depend less on export and investment spending and more on domestic demand.

“We believe that the strong prospects for growth in many emerging markets are not currently recognized in equity valuations,” said the executive. To Mobius, two particular investment themes stand out to: consumers and commodities. “The consumer theme arises from consumers in many emerging markets becoming increasingly wealthy (…) the commodity theme reflects our expectation for strong growth in demand for hard and soft commodities as many emerging markets industrialize, likely grow wealthier and increase spending on infrastructure.”


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