Economist Nouriel Roubini earned the nickname “Dr. Doom” after correctly predicting the credit crisis and then subsequently forecasting bearish scenarios for economies around the world.
More recently, the epicentre of risk has moved to the emerging markets, highlighted by volatility in the Fragile Five: India, Indonesia, Brazil, Turkey, and South Africa.
Amid the ongoing turmoil in the emerging markets, Roubini told Business Insider’s Joe Weisenthal that we witnessed a “mini perfect storm.”
“[B]etween Chinese PMI of 50, Argentina letting its currency go, noises coming politically from Ukraine, Turkey, and Thailand … the contagion is not just within emerging markets but also affects advanced economies’ equity markets,” he said.
However, “mini” is the operative word.
Like most economists, Roubini doesn’t think these emerging-market woes will persist or escalate into something much worse.
“[T]he threat of a full-fledged currency, sovereign-debt, and banking crisis remains low, even in the Fragile Five, for several reasons,” wrote Roubini in a new piece for Project Syndicate. “All have flexible exchange rates, a large war chest of reserves to shield against a run on their currencies and banks, and fewer currency mismatches (for example, heavy foreign-currency borrowing to finance investment in local-currency assets). Many also have sounder banking systems, while their public and private debt ratios, though rising, are still low, with little risk of insolvency.”
These hiccups are just a symptom of rapid growth in a developing economy. Standards of living will continue to rise, which means increasing numbers of people will demand more goods and services. And there will need to be a substantial infrastructure buildout to support this. All of this means big rewards for investors willing to stomach the short-term volatility.
“Over time, optimism about emerging markets is probably correct,” Roubini continued. “Many have sound macroeconomic, financial, and policy fundamentals. Moreover, some of the medium-term fundamentals for most emerging markets, including the fragile ones, remain strong: urbanization, industrialisation, catch-up growth from low per capita income, a demographic dividend, the emergence of a more stable middle class, the rise of a consumer society, and the opportunities for faster output gains once structural reforms are implemented.”
However, “it is not fair to lump all emerging markets into one basket; differentiation is needed,” warned Roubini.
Indeed, while the long-term outlook is generally bright for the emerging markets, investors should consider the local stories before committing their capital.