US need to restore confidence in its capital markets in precisely the same way emerging market economies have done. Until that can be achieved, all bets are off.
We are the ones given lessons here, Elroy.
The triumph of the capitalists.
Mike Foster
17 Dec 2007
Emerging economies use rising prices and fiscal prudence to overtake the developed world
As one door closes, another opens. In a year when the US credit crisis started to starve the western banking system of liquidity, emerging markets are in the rudest of health.
Their renaissance amounts to a triumph for the capitalists, far removed from the 19th century dogma of Karl Marx that workers would rise to claim the fruits of their labour.
True, Robert Mugabe’s Zimbabwe is one of the few countries still intent on stealing assets from the private sector. And Hugo Chávez of Venezuela has nationalised a few basic industries, even if his loss of a referendum in November has put limits on his ambition to socialise the country.
However, Libya, Nicaragua and Nigeria, once seen as pariahs, are embracing free-market disciplines. North Korea could soon follow suit, to judge by recent visits to the country by a string of Chinese entrepreneurs.
Brazil, Russia, India and China are way down the capitalist road. China’s booming economy has played an important role in convincing dictators that state capitalism can be an instrument of social control, rather than a trigger for democracy. Capitalism also makes sense to educated technocrats who witnessed the inertia, and death, of Soviet communism.
The rise of capitalism in the emerging economies dates from the late 1990s, following the Asian and Russian financial crises, when governments realised they needed a balanced budget to maintain their grip on power.
One firm that sensed the truth was UK-based Ashmore Investment Management, bought out of banking group ANZ in 1999. After diligently canvassing their views, head of research Jerome Booth realised emerging market central banks were ruthlessly determined to put sound finance in place.
In the years that followed the level of savings in the emerging markets have risen to 30% of gross domestic product. By buying cheap emerging market debt, Ashmore pushed its assets under management from less than $500m in 1999 to $33bn by October. You cannot get a better proxy for the way emerging markets have emerged, blinking, into the sunshine.
Over the past five years, confidence in government and corporate balance sheets started to underpin emerging market equity markets. China pegged its currency to the dollar, to keep its export pricing advantage. Other countries, most recently Brazil, have been doing the same. A final upward push in the emerging market cycle resulted from the soaring price of commodities needed to fuel expansion. It so happens that most of them are owned by emerging market countries, now that the west’s reserves have been exhausted.
Demand for cheap imports from US consumers has played a key role in financing the growth of emerging economies. China’s GDP growth this year is 11.5%; Russia is enjoying 7.2%; India 7.9% and Brazil 4.7%. By comparison, the US and western Europe are marooned around 2%. In local currency terms, emerging market indices are up 32.8%, this year, against 7.4% in the US.
All this has fuelled an enormous number of initial public offerings and takeovers in emerging markets as governments and wealthy entrepreneurs seized a golden opportunity to crystallize their gains. Listings on emerging markets total $153bn so far this year, compared with $138bn in the developed markets, according to Thomson Financial. This year will be the first that the emerging markets raised more equity finance than developed economies.
The Chinese Government has used market euphoria to refinance inefficient state-owned banks and companies. The latest to reveal a rejig is the Agricultural Bank of China, which announced plans to diversify into investment banking, with a listing expected next year. China is equally keen to import capital to keep the pot boiling.
A stream of mining companies from the former Soviet Union have raised finance in London. Gazprom is a resource giant so close to the heart of Russian President, Vladimir Putin, that he made one of his best friends – now his successor – Dimitry Medvedev its chairman.
Microfinance in Africa and Asia, which involves advancing small sums to co-operatives, is booming as never before. This form of finance displaces loan sharks to finance the endeavours of willing workers. It has become a better business proposition than providing mortgages to impoverished individuals in the US rust belt. The 30% growth rate for microfinance compares to sub-prime-related write-offs by banks totalling $67bn in 2007. The microfinance default rate is 4%, against 18%-plus for sub-prime.
Far from fearing the firepower of sovereign wealth funds, swollen by currency gains, the likes of Citigroup and UBS, weakened by the sub-prime fiasco, have welcomed them. Not that the funds are a soft touch – they have subscribed for convertible stock that will bring them initial yields upwards of 9%.
Purists are critical of the oligarchs in Russia (and beyond) who have profited from stock market gains. Carlos Slim of Mexico became the world’s richest man, worth $59bn, this year after taking advantage of the quasi-monopoly of Telmex, his telephone group. Naguib Sawiris, estimated to be worth $10bn, and his brothers control companies comprising 40% of the Egyptian stock market. But their influence is no greater than those enjoyed by robber barons in the US and Europe in the 19th century, when the Industrial Revolution was pouring wealth into their pockets.
Analysts also have a habit of portraying the rise of the emerging economies as a threat to the west. On the contrary, their conversion to capitalism is set to offer a huge opportunity to companies in the US and Europe tooled up to offer the services they need.
There are flaws in the emerging market renaissance. Equity prices, particularly in China, are being forced up within free floats that are painfully thin. Companies have developed the unhealthy habit of buying shares in each other. Day trading is frenetic. Corporate governance can be poor.
There is also a danger that credit contagion could spread from west to east. Zhou Xiaochuan, governor of the People’s Bank of China, warned last week that US monetary policy could lead to a new burst of excess liquidity in global markets.
Pictet Asset Management strategist John-Paul Smith argues that US equities, and the dollar, are starting to look attractive compared to the emerging markets. Productivity in the US is in good shape, and there is strong demand for its products in emerging markets.
But to stage a convincing revival, the US will need to restore confidence in its capital markets in precisely the same way emerging market economies have done. Until that can be achieved, all bets are off. |
