In my first column a month ago, I raised the possibility that China’s softer growth might not be all bad for us here in the UK, as long as it is generally confined to their own production and is reflected in a period of softer commodity prices.If that’s the case, a number of commodity-importing countries, ourselves included, will not suffer the sorts of strains on disposable incomes that we have experienced in recent years.
I had not previously considered that their softer growth might actually help us, having assumed stronger growth for them was better for all of us elsewhere in the world.
Since then, the latest data releases in China for the month of May have been generally softer again, confirming that China is experiencing a period of weaker growth. It also looks as though their policymakers are broadly content with this.
Importantly, while growth is softer, domestic consumer spending, at least as measured by their monthly retail sales, is holding up relative to their production. I see this as a broadly more reassuring picture for them, and therefore for the rest of us also.
It is becoming more fashionable in financial circles to suggest that the great era of emerging market growth, and with it the case for investing in emerging markets, is at an end. It is true that more of the countries that have done so well in the past decade are showing signs of problems and are facing new challenges, but I suspect this is not something that can be simply generalised.
More interesting is the fact that this broad story of softer growth in emerging markets is coinciding with increasing signs of better growth in the developed world, especially the UK, but I suspect that, beyond the indirect benefit of commodity prices, this is also a coincidence.
In addition to China’s slowing – much of which has been deliberately engineered in favour of more balanced, higher-quality growth – each of the other BRIC countries is disappointing in 2013. India’s growth for the last financial year has been just over 5pc; Brazil is growing at less than half that; Russia is growing between 3pc and 4pc, but signs of underlying issues about the style of leadership increase.
To this list, we can now add concerns about Turkey – “a BRIC in our neighbourhood”, as the Prime Minister accurately described the country during his first overseas trip – with Indonesia and Mexico also both slowing a little. That just leaves Nigeria and other parts of Africa as the champions of strong growth in the emerging world, or at least on the levels many have been hoping for.
In the investing world, the emerging market bond story was one that captured investors’ imaginations more than the emerging market equity story, judging by the size of relative flows. Some of us worried that this relative asset judgment might not turn out to be much more than a leveraged play on the low interest rates and super-easy monetary policies of the US Federal Reserve. We feared that, once the Fed showed any signs of backing away from this, those bond markets might take some fright.
Sure enough, in the past month, as markets have focused on the US economic releases and signs in Fed commentary about “tapering” – the easing of the pace of Fed liquidity additions – many emerging market bonds have suffered more than US bonds.
This has echoes of 1994 and the only savage, near-12-month bear market of the past 30 years. Investors would be advised to think carefully about what really could happen when the Fed definitively steps off the gas.
Which brings me back to the broader topic of emerging markets. Since I first invented the BRIC acronym nearly 12 years ago, I have always believed it is old-fashioned to think about the world as “developed” versus “emerging”. And it is just as inappropriate to think of all those countries that are outside the Organisation for Economic Co-operation and Development umbrella of “developed” (which, in fact, a number of emerging countries aren’t) as the same, or as facing the same issues. We have to think about these countries separately.
What it probably does mean is that investors, especially less well-informed retail ones, should be careful about broad emerging market funds, and especially ones geared just to bonds. I also don’t think people should just blindly follow the GDP growth from any one of these countries, but should look instead at the quality and sustainability in terms of what they may offer – and, of course, the valuation implied at any one moment by their markets. In this regard, they almost definitely aren’t any different from the rest.
Jim O’Neill is former chairman of Goldman Sachs Asset Management and chairman of the education charity Shine (www.shinetrust.org.uk)
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