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Asian economic miracle version 2.0

Finance Blogger: Ian Fraser Ian Fraser

The flow of economic power from West to East has been massively accelerated by last year’s banking and financial crisis; indeed if investment managers’ predictions for 2010 are to be believed the process has become unstoppable.

Many of the world’s leading investment management firms are predicting, in their outlooks for 2010, that the emerging economies of Asia-Pacific, and to a lesser extent Latin America, will outperform the developed markets in 2010.

It almost makes one feel sorry for fund managers who are forced to invest in more clapped-out economies like Britain and the US.

Factors seen as positives for the Asia-Pacific region include its burgeoning middle class, its high savings rate, its commodities wealth, and the unparalleled scope for increased consumer spending in countries such as China.

Allan Conway, head of emerging market equities at investment managers Schroders, says emerging economies have replaced the US as the engine of global growth:

“Under any of our scenarios, double-dip, V-shaped recovery or slump, we forecast that emerging economies will outperform developed economies,” he said. “The emerging economies will account for 70–75% of global growth every year for the foreseeable future. This is a major structural change as significant as the Industrial Revolution was in the 19th century. In the past, the global economy was driven by the developed economies and emerging markets relied on developed world demand for their exports—the reverse is now the case.”

His enthusiasm was echoed by fund managers at a recent Reuters Investment Outlook 2010 summit. Speaking at the event, Bob Doll, vice chairman of Blackrock, told Reuters the “absence of the debt noose around the neck that much of the developed world has” makes the emerging economies promising places to invest, even though the MSCI emerging markets index has already surged by 70% this year.

Tom Geraghty, head of investment at investment consultants Mercer, says: “We believe the events of the last few years will come to be seen as the catalyst for a paradigm shift in the way we all invest … The new dynamics of the game will include an end to Western supremacy in the investment world. Global returns are becoming increasingly dominated by the emerging markets.”

Fidelity, whose president of investment Anthony Bolton is relocating to Hong Kong to catch the new investment wave with the launch of a China fund, also believes shares in Asia-Pacific companies will outperform those in the developed world.

HSBC Global Asset Management favors emerging markets, but is more bullish about Latin America than Asia-Pacific. Simona Paravani, strategist at HSBC GAM, says because of their lower price-to-earnings ratios “Latin American equities have the potential to outperform, especially if economic readings continue to surprise on the upside.”

HSBC forecasts Brazil’s economy will grow by 5.3% next year, versus 1.1% for the eurozone. Some argue that the maturity of Brazil’s financial markets means it almost has “emerged” and joined the ranks of more developed economies.

In the darkest days of the financial crisis last year, investors dumped all their emerging market assets and currencies and sought safe havens in short-dated US Treasuries and cash. But since March 2009 emerging market assets have been back in vogue as investors began betting the biggest emerging economies would lead the world out of recession.

At the Reuters event Jim Rogers, famous for co-founding the Quantum Fund with George Soros, said he likes Brazil and fiscally prudent countries such as China. However Rogers said he dislikes India because the bureaucracy is stifling and avoids Russia because investors can end up “broke and dead.”

Further reading:

Tags: Asia-Pacific , Brazil , China , demographics , economic recovery , equities , GDP growth , Mercer , price-to-earnings ratios
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