Slowing growth in emerging markets poses a challenge for investors
The good thing about emerging market economies is that they generally thrive. To be precise, they grow faster than developed markets such as the United States, providing superior returns to investors who are prepared to take the typical emerging market risks of frequent upheavals and setbacks.
Indeed, the GDP growth differential between emerging and developed markets is perhaps the most closely watched indicator of projected returns on emerging market assets.
So it cannot be good news for emerging market investors that emerging markets are now growing at a slower pace than the United States. David Hauner, emerging markets strategist and economist at Bank of America, said next year, as a group, emerging markets outside of China will experience slower growth than the United States for the third year in a row.
China itself is not doing better either. BofA predicts that by 2022, the world’s two largest economies will see growth roughly neck and neck, at just over 5% per year.
“This is literally the lowest relative forecast differential in data history since the 1980s,” Hauner said.
Faster growth in the United States means a stronger dollar and rising US Treasury yields, both of which are difficult for emerging market assets. The slowdown in growth in China is also bad. What follows will therefore be crucial.
“We’re approaching a super interesting junction,” Hauner said. “The next two months will be judgment day for the global economy and in particular for emerging markets.”
He paints two scenarios. In the first, energy prices, which have skyrocketed in recent months due to supply issues, are coming back from their peaks and easing pressure on global inflation, while policymakers in Beijing hold a Chinese real estate industry crisis soft landing.
In the second scenario, energy prices continue to rise and China’s slowdown worsens.
The first scenario offers a return to the story of the global recovery that led investors to take an interest in emerging markets earlier this year. The second scenario offers a significant disentangling of risky assets, in particular emerging market equities and bonds.
“Our point of view is the most constructive,” Hauner said. But, he warned, with that comes a caveat. If so, investors can earn a few percentage points. If this is wrong, the losses will be double digits.