Emerging markets outpace US as the 'driver of global growth'

Despite a disappointing first quarter where emerging equities fell in line with global markets, the outlook for the asset class remains positive and emerging economies will continue driving global growth for years to come.

According to Jeff Chowdhry, Head of Emerging Equities at F&C, emerging markets as an asset class are now a bigger contributor to world economic growth than the US in terms of percentage share.

"Our estimates tell us that two thirds of this year's global growth will be directly attributable to emerging markets which means the investment story in the region is still very compelling. Year to date emerging markets have fully participated in the downturn suffered by developed markets but that in itself shows a higher degree of maturity. In the past, when developed markets did really badly, emerging markets did much, much worse. Current losses are much more in line with what is happening elsewhere and I am very confident that when risk aversion settles down, emerging markets are likely to outperform the upside," Chowdhry said.

In recent months, as the global economy has slowed down, there has been a lot of talk about 'decoupling' and whether emerging markets can avoid the worst effects of any US and European economic malaise. "At this stage we all know that we cannot categorically say emerging markets economies are completely decoupled from developed economies because we live in a global market with free flowing of goods and services. However I can confidently say that emerging markets economies are much more resilient than they were even 5 years ago to any global downturn. Even if emerging economies cannot decouple with the US, they are in a much better position than many developed countries to withstand an US recession."

Chowdhry identified domestic demand and infrastructure spending as two of main drivers behind emerging markets growth. "High commodity prices are indeed contributing to this growth but the future of these economies is not only dependant on commodities. The transformation that these countries are undergoing in terms of economic growth and personal wealth means that demand for telephones, cars, retail goods, houses and mortgages is here to stay. This 'wealth effect' will be a major contributor to future growth. "

Moreover, investment opportunities are also being found outside the 'BRIC' economies, which have grabbed much investor attention in recent years, with other less noticed regions offering long-term portfolio growth potential. Emerging Europe, the Middle East and some economies in Africa and South East Asia are growing very rapidly, expanding and diversifying the investment universe of the asset class. The Next-11, as this BRIC's successors have been labelled, includes countries such as Egypt, South Korea, Mexico and Turkey.

"We are continuously exploring new potential investments across different markets. The beauty of investing in emerging markets is that the opportunities are very far from being exhausted," said Chowdhry. "At present we are very positive on the Russian economy which is growing very rapidly, underpinned by high oil prices. Valuations of Russian stocks are attractive and the market offers high levels of liquidity," he explained. "We are also very positive on Brazil where we find good valuations and strong earnings growth, as well as the Middle East where liquidity is good."

"At the beginning of the year I expected emerging markets to rise between 10 to 15% by the end of 2008. Despite the turbulent first quarter, I am still sticking to my original forecasts. I believe that by the second half of this year, analysts and economist will be looking forward to 2009 and saying the worst part of the slowdown is over. As a result, and despite the fact that emerging markets are currently down nearly 8%, they could easily rise 15 to 20% from current levels in my view."