Emerging To …

Emerging From …

What’s happening with emerging economies?

Country size weighted by projected population in 2050. Source: Worldmapper.org

It wasn’t supposed to be this way.

The developing economies were supposed to lead the markets higher. The combination of population growth and development economics should have provided a turbo-shot to older, mature, slow-growing developed economies. Bringing subsistence farmers into cities to work in factories has been a time-honored development formula. Increased productivity raises profits and provides higher wages, lifting the entire economy. Every emerging economy has emerged this way.

But that train seems to have gone off the rails. Today, emerging economies are being buffeted by higher interest rates in the US, lower commodity prices around the world, and a slowdown in world trade. Their managed economies have managed to produce too many factories pumping out goods that no one wants using borrowed money that no one expects to be repaid.

And corruption reigns. Crony-capitalist systems rely on influence rather than economics to get things done. And when the music stops playing and everyone grabs a chair, poor governance regimes are unlikely to respect the property rights of foreign investors.

Developing (white) and World (gold) markets. Source: Bloomberg

So rather than leading the rest of the world higher, emerging markets seem to be pulling global markets down. Currency devaluation threatens to export global deflation. Their massive foreign exchange reserves – over $10 trillion, built up after the last emerging market crisis – have begun to decline. And planners seem to be skidding from one market intervention to another: banning short sales, banning insider sales, declaring market holidays, even prosecuting reporters as market manipulators.

But the time to buy is when the blood is running in the streets. Emerging markets have been stagnant for over five years, even as stocks in the rest of the world push to new highs. Poor governance will not be sustained if these countries want to access global markets and global capital. Minsky’s dictum–every situation creates forces that lead to its own destruction—works to the upside as well as down. Mismanagement leads to new management, in countries as well as companies.

The only constant in the markets is change. And the expected rarely happens.

Douglas R. Tengdin, CFA

Chief Investment Officer

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