June 15, 2021
Asian growth could be much stronger than expected
Emerging countries have by definition always offered the promise of high growth - but investing successfully in them has never been straightforward. We believe now there are a number of factors converging that set the stage for exceptional performance for a select group of emerging markets.
From a global financial perspective, emerging markets are much more diverse than probably ever before, choosing certain countries and regions is important - one broad ETF will not be the best way to invest. We expect China to still the most important driver of emerging market growth centered around internal demand from their middle class and exports to the countries connected by the Belt and Road initiative. Trade and finance will be greased by the first sovereign digital currency set to launched by China very soon.
China-centric China’s economy is primed to transform from primarily an exporter of low-end manufacturing goods to the West to one with a wealthier middle class consuming more and exports increasing to Central Asia along their Belt and Road trade routes. The introduction soon of their digital currency will make it all easier and faster than most expect. Other Asian countries, both developed and developing, will find themselves more intertwined in this Asian economic and financial eco-system centered around China. There are always plenty of things to cause tension, but the desire to do more business usually wins out.
The countries surrounding China will be beneficiaries of the trade links being developed by the Belt and Road infrastructure initiative.
India’s time
The potential most of seem in India may finally be coming to fruition. The move to a national digital ID has been a game-changer for business efficiency, access to financial services, and reducing corruption. Another leap forward will occur once they introduce a digital currency someday which is likely to be spurred on by China’s lead. Politics, religion, and regional differences will always make India look messy to the outside, but expectations there are now firmly in place for a more productive economy.
Youthful demographics favoring faster growth There is typically a big economic benefit to having a large proportion of younger households in a country relative to the overall population since they tend to produce more and consume more. This factor only comes into play though if the country is successfully transitioning politically and economically - there must be an economic platform for the young to succeed. Nearly all of the countries with larger young populations in the world are now in emerging markets. Most of those in a position to take advantage of this are located in Asia.
Southeast and Central Asia are full of emerging countries with young populations heading into the beginning of their most productive years.
Median age by country, CIA World Factbook, 2016 est. - Wikipedia
Financial lessons learned In the late 1990s, Asian markets were decimated when the USD appreciated making their huge load of debt priced in foreign currency too much to service. Central banks in emerging markets, especially Asia, are much better funded with USD reserves and borrowers are much more careful to not extend themselves in foreign currency debt.
Post-COVID Boom
Between pent-up demand and the splurging of Western governments, the stage is set for an extended period of higher than normal growth worldwide. Many emerging economies will get an extra boost since raw materials and commodities are mostly produced in emerging markets. Adding to the demand for commodities will be the intense focus on infrastructure and the conversion to green energy.
Copper is a key basic commodity. If this increase in demand is sustainable, it could be enough to push many commodities like copper to much higher price levels.
Weaker US Dollar
The USD could get much weaker due to the growing political comfort for the US to spend way more than it collects in taxes and the Federal Reserve Bank’s comfort to fund the difference by printing more money. Since the majority of world trade is still done in the USD, a weaker USD is generally very bullish for world growth. This is especially true for emerging markets since they sell a lot of commodities typically priced in USD.
The USD versus the most important developed market currency, the Euro, appears to be breaking out of a multi-year range. (Chart of the Euro vs USD, a higher price implies stronger Euro and weaker USD.)
The USD versus the most important emerging market currency, the Chinese Yuan, also appears to be breaking out of a multi-year range. (Chart of the USD vs Yuan, so a lower price implies weaker USD and stronger Yuan.)
What could go wrong
If growth slows, deflation reemerges, and/or the USD gets stronger – emerging markets will most likely not do well. They are not trading at multi-year lows either, so there is some obvious downside if the bullish case does not play out. What could cause any of these risks to occur? A U-turn in the path to a normal vaccinated world would be bad for all. Central Banks might raise rates if inflation becomes too high which usually leads to bear markets. In my opinion, none of these look probable at the moment, but things could change. Therefore, country selection, allocation size, and time-horizon are all very important factors when making an investment.
Where to Invest
China, Southeast Asia, and parts of Central Asia are obviously the focus. There are a few other interesting cases outside those regions, but Asia is key. Broad emerging market ETFs tend to be dominated by holdings in Chinese tech, but there are plenty of single-country ETFs and even some focused on certain sectors that can be used to build a portfolio. There are also some actively managed funds that can sometimes do a better job at stock picking than the index ETFs. Some of these are closed-end funds trading on exchanges and some are private offerings. The private ones sometimes invest in local IPOs which can be effective if the economy is growing fast. Another place to consider investing is major local banks. As key players in economic growth, they should do well if the growth is high.
Overall, be sure to invest with a long-term horizon, since clearly many emerging markets are on their way to higher standards of living and higher valuations given time.
Disclosures
This blog article nor my advisory entity is not making any recommendations, only pointing out strategies for consideration. Investors should do their own research and consult their advisor before making any investment decisions.
Notaro Wealth Advisory is a registered investment advisor. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this blog post are as of the date of the posting, are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like accounting, tax or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Notaro Wealth Advisory unless a client service agreement is in place.