Baltic Business Research

Baltic & China Day, October 7, 2013 at Linnéuniversitetet – Linnaeus University, Kalmar

1. BRIC(S)  –  an artificial creation I never have really understood the idea of putting Brazil, Russia, India and China – and more lately South Africa – in the same analytical basket called BRIC(S). It was certainly an ideal country mix for the marketing of mutual funds a dozen of years ago – but not really logical from a global investor’s perspective. The only factors the four leading emerging countries had in common when “BRIC investments” were started a dozen of years ago were higher GDP growth than in many other emerging economies and/or large populations. Thus, the BRIC “movement” nowadays does not appear very logical because of too large political/structural discrepancies between the four (five) countries and more synchronized global growth.

2. Country diversification for financial investors – less logical today Another reason that probably contributed a lot to the initial global investors’ hausse on BRIC capital markets was most probably the then especially popular models of geographical diversification. A number of emerging economies were during a couple of years -in a too simplified way – regarded as ideal for risk diversification purposes. During the past decade, however, we’ve seen increasing herd mentality on the capital markets of emerging countries – an increasing herd mentality which not always could be graded as logical. This trend makes previous country diversification strategies – generally spoken – today less attractive and many times also more risky. Sometimes, however, it still may work.

3. Microeconomic / corporate stock-picking makes often more sense Good (short-term) portfolio investments in emerging countries are today certainly – or should be!  -more influenced by corporate and institutional/microeconomic conditions than a decade ago. Regional/geographic parameters may be applicable when having certain needs of asset allocation – but not necessarily. Stock-picking with sectoral, microeconomic and special corporate variables should mostly be preferred compared to highly macroeconomic growth-led strategies. This approach, however, is not contradictory to good macroeconomic country research and knowledge about the countries that managers/individuals want to invest in. This certainly includes emerging economies.

4. Current nervousness – rather the way back to normalization The objective with this presentation is to show that BRIC countries in the past decade or so received too much attention by global fund managers which in some countries – also outside the “BRIC region” – led to overvalued currencies. This is why I would argue that we currently rather see a kind of normalization in (some of) the BRIC countries – a normalization that is expressed by increasing attention of global investors to structural weaknesses and, consequently, to pressure on currencies in a number of other emerging currencies, too. But many of the problems in some emerging countries that financial markets reacted so negatively on more recently have been well-known for years. Nothing special happened in the summer 2013 – apart from speculations that the American central bank Fed soon might reduce its QE purchases of bonds (which would ceteris paribus lead to higher interest rates in the U.S. and – thus – according to financial markets make investments in emerging countries less attractive; but these prospects was probably a too far-reaching reaction in summer 2013).

5.  Certain emerging countries continue to grow faster than other others – but we will see new winners and also surprisingly weakening countries When looking at graphs that compare GDP growth of emerging economies with those of traditional OECD countries in the past twenty years, we can recognize a sharply increasing gap between these two groups of countries. Emerging countries caught up rapidly. For the next year or for an even longer period, many forecasters now believe that this previously increasing gap gradually will become closer again. Emerging markets are considered to grow more slowly and become much less attractive – for financial investors as well.

I cannot share this opinion about the longer perspective. Sure, there will be future problems in certain emerging countries – due to shrinking productivity gains and lagging structural reforms. Emerging economies cannot be treated and analyzed as a homogenous group of countries – rather the opposite. Some current winners among emerging countries will be the losers of tomorrow (keyword “middle-income trap”) – but things may also turn out the other way around, i.e. to the better for certain countries. Other emerging countries will be caught by the so-called “middle-income trap” because of insufficient continuous policy reforms and lagging institutional improvements.

But it also would be naïve to believe that our part of the world in the future will develop without major challenges and problems (which, however, also may influence emerging economies more negatively than generally expected).  We should keep in mind that global interdependence has increased sharply since the early 1990s – and will continue to do so.

Structurally better performing old OECD countries will also in the future be important growth drivers for emerging countries. This side of the medal should not be forgotten!

Summary: Markets may have (somewhat) overstated potential growth of emerging countries during the past 5-10 years. Despite this fact, the role of emerging economies in the global – and the Swedish – economy will increase further. It is not easy to understand how the emerging economies function. We all need to learn more. Further “miracles” for the total group of emerging economies won’t be the melody of the future. But there will room for more good and/or satisfactory growth of countries that follow “the rules of the game” and/or that combat the risks of the middle-income trap.

To conclude:  I find it very encouraging that more and more students at LNU understand the need of steadily improving their understanding of the very interesting and important emerging economies. Emerging markets will on trend – despite occasional distortions – continue to gain shares in global production at the expense of traditional industrial (OECD) countries. This still seems to be a safer conclusion than the opposite.