It’s far too early to say whether last week’s convulsions in global stock markets are the start of a world-wide bear market.
For all sorts of reasons – the relatively small size of China’s stock exchanges, the economic recovery in America, even the possibility of a European upturn – the world may be able to weather some Chinese financial instability as long as that country’s economy undergoes the “soft landing” most economists still expect. We’ll see.
But the “China crisis” of 2015 could well be the nail in the coffin of the concept of “emerging markets” or EM. That peculiarly western idea – that there is a pool of countries out there that you can depend on for fast economic growth and dynamic investment returns – has surely had its day.
We are still awaiting the final figures for August, but by the end of July total outflows of capital from the countries’ experts give the once-valued EM ranking were approaching the $1 trillion level. That is nearly double the amount withdrawn from EMs during the global financial crisis of 2009.
Slowing growth, weakening currencies and lower commodity prices, on top of fears about the levels of sovereign debt, have wiped out the attractions of the EM.
From being the engines of global growth after the crisis, they are now seen by many investors and economists as obstacles to economic recovery.
It is fitting that western investors, in pulling their trillions out of the rest of the world, may be signalling the death-knell of the EM concept. Because it was they who invented and promoted the term in the first place.
Many years ago the countries we now refer to as EM were known as the “third world”, in the simplistic view that divided the globe into western capitalism, Soviet-inspired communism, and all the rest.
In a nod to political correctness (and economic accuracy) that was replaced by the concept of LDCs – less developed countries – in the 1980s, and then morphed into EM some time later. EM was a recognition of the fact that economies grew and changed status over time, and what was “less developed” in 1990 might not be so in 2000.
China was the obvious catalyst. Its phenomenal rates of growth – double digits for most of the two decades running up to 2009 – meant it could no longer be classed simplistically as “LDC”. China, in fact, was a whole world of economic classifications in one, from the developed cities of the east to the distinctly “third world” rural economies inland.
There were all sorts of attempts to refine the grouping further, the most notable and successful being the BRICs – Brazil, Russia, India and China. (South Africa, later attached as a fifth bric, was always a political rather than economic addendum).
But the EM tag has been unsatisfactory for a while. Some experts suggested replacing it with the concept of “fast-growth” economies, and that had some resonance among international investing institutions seeking big and rapid rates of return.
Now, however, it is hard to argue the “fast-growth” case any more. Of the original Brics, Brazil and Russia are in recession, and China’s rate of growth is slowing. Only India is on a fast-growth track. One wag last week talked about the need for a new category of “submerging markets”.
Ethiopia, Turkmenistan and Democratic Republic of Congo, according a recent study, are the three fastest-growing economies in the world, which just goes to show how meaningless the tag has become. None of them can be regarded as investment magnets to drive global growth.
Should Arabian Gulf markets – with the UAE and Qatar recently promoted to EM status on the MSCI indices and a potential Saudi upgrade on the cards – be concerned about this?
Not necessarily. The MSCI upgrades relate to the stock markets, not the economies, of those countries, although in a general global reduction of investment in EM markets, Gulf economies will inevitably see some downward pressure on foreign direct investment.
That makes the issues of lower oil prices and pressure on government spending all the more challenging, emerging market or not. The region has always had its own economic imperatives.
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