Bouncing tigers—or bitten dragons

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Transcript of Bouncing tigers—or bitten dragons

Bouncing tigersor bitten dragons? Emerging market jitters, advanced market rethinks, and the Asian outlook in 2014

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A management brief prepared by the Economist Corporate Network

Bouncing tigersor bitten dragons? Emerging market jitters, advanced market rethinks, and the Asian outlook in 2014

1 The Economist Corporate Network 2014

The Viewscope A quick read of the brief and its findings

Has Asia lost its way, or is it just getting started? The drivers and direction of Asias economies are under increased scrutiny by global investors in 2014. Emerging Asian markets are being questioned for their lack of structural integrity, and a persistent opacity in their political and regulatory environments. By contrast, rich-but-stagnant advanced economies are increasingly attractive to global capital as their economies finally get back on track.

Bigger, betterbut not all alike.Emerging Asias swiftly tilting demographics may be globally unique in their speediness, but are symptomatic of a central challenge facing global investors: all EMs are neither equally sound (or fragile) opportunities, nor are they developing at similar rates. This demands a crisper framework for evaluating emerging market fundamentals.

Emergers are doing it for themselves. There has been a perceptible shift in the pattern of trade among emerging markets in the past decade; increasingly, this has meant that emerging Asia trades more with itself. Asias trade with other emerging regions, driven by similar consumption trends, has also accelerated.

Neitherand both!The Economist Corporate Network believes that neither is Asias time to shine finished, nor is it the gem it once was. The future of the global economy is both dependent on Asias continued healthy growthyet Asias health is also dependent on the rest of the world believing in its success.

Still got some heat on it (and in it). Chinas growth continues to moderate, yet observations that Chinas slowing economic progress is systematic of its eventual collapse are clearly overstated. There are enormous, and obvious efforts on part of the Chinese government to engineer a complex and thorough re-orientation of its economic growth drivers, away from the capital investment which has fueled productivity gains for nearly a quarter century, and towards a domestic consumption-led economy. To achieve this, China has accepted profound changes in the way it competes globally.

Zeros, and/or heroes.It appears that enthusiasm for rich world markets is informing (perhaps even intensifying) distain for emerging markets. Yet, this is far from a zero-sum game. Many emerging economies do suffer from such structural weaknesses as expanding current account deficits, but many more continue to push millions of new consumers into the middle classes, sustaining domestic consumption levels across Asia. This in turn helps the rich world, as well: Japans export levels continue to grow from robust emerging Asian demand.

Tempest Fugit. There have been disconnects between market movements and economic fundamentals, but the degree of variance is likely due to the tremendous recent change in the worlds advanced economies rather than change in emerging market fundamentals. Which is not to say that there are not good reasons to be skeptical of the EM narrative, nor is it to say that what plagues emerging markets does not negatively impact the advanced economies. In the end, it is the fact that the global economy is continuing to grow as an interconnected system of goods and capital that is preserving growth for all participants.

Bouncing tigersor bitten dragons?Emerging market jitters, advanced market rethinks, and the Asian outlook in 2014

2 The Economist Corporate Network 2014

Has Asia lost its way, or is it just getting started?2013 was a surprising year for investors in Asia, in many respects. The long-awaited coordinated global economic recovery came about, but later, and slower, than anticipated. This delay (the econo-mies of the US, the Eurozone and Japan were not all growing uniformly positively until well into the second half of the year) kept global demand dampened for Asian exports uncomfortably longer that the region needed. Additionally, and ironically, the US Feds hinting at an end to quantitative easing caused a stampede of hot money out of fast-growing emerging markets (EMs)particularly in Asia. Yet while this exposed some structural weaknesses in EMs, it was the compounding effect of global capitals self-fulfilling prophesy which did more to dampen market momentum in such places as India and Indonesia; the currencies of both countries are still trading roughly 15% lower than they were nine months ago. Much of this sentiment has been carried through into 2014; even stalwart China has felt the unfamiliar impact of global investor mood swings. As of this writing, the renminbi is trading 0.6% lower against the dollar than it was on January 1st.

By contrast, advanced economieseven, and particularly, Japanare benefitting from renewed investor interest. Clearly, global capital does not feel that emerging markets were just a fad; much of the capital that fled Indonesia in mid-2013 for instance has returned, or at least been replaced by more confident punters. A rebalanced global economy is still one where emerging markets GDP expands at more than twice the rate of developed ones, and will do so for some time. But what the Taper Tremor has taught us is that all emerging markets are not equally sound. This Economist Corporate Network paper argues (at the risk of seeming ambivalent) that neither is Asias time to shine finished, nor is it the gem it once was. Further courting ambiguity, it also argues that the future of the global economy is both dependent on Asias continued healthy growth and on the rest of the world believing in its success. Key points in this paper are as follows:

False fragility. There are very few fundamentally flawed economic narratives in Asia; Indonesia in particular was unfairly lumped into the so-called fragile five. Global investors must diligently distinguish between good EMs and bad ones in Asiaand commit to them.

China keeps on keeping on. A favorite past-time of the global investment community is to second-guess the ability of Chinas policy makers to keep the worlds second-largest economy on track. We believe that, in the main, China will continue to be one of the worlds largest growth opportunities, and while it will continue to mature, it will not implode.

The tides coming infrom all sides. Underpinning much of Asias continued success is the fact that this region singularly continues to extract economic benefit from growth in the rest of the world. Global trade continues to be Asias life-blood, yet while advanced economies (the US, Japan and Europe) will continue to be the biggest suppliers, it is actually demand from within emerging Asia, coupled with other fast-growing emerging regions such as Africa which will sustain its growth trajectory.

Bouncing tigersor bitten dragons? Emerging market jitters, advanced market rethinks, and the Asian outlook in 2014

3 The Economist Corporate Network 2014

Zeros, and/or heroes The drivers and direction of Asias economies are coming under increased scrutiny by global investors in 2014. Emerging Asian markets are being questioned for their lack of structural integrity, and a persistent opacity in their political and regulatory environments. By contrast, rich-but-stagnant advanced economies are increasingly attractive to global capital as their economies finally get back on track. In Asia, this renewed confidence has focused on Japan; the worlds third-largest economy has, after decades-long stagnation, been jolted back to life with decisive policy reform and corresponding market enthusiasm.

In many respects, it appears that enthusiasm for rich world markets is informing (perhaps even intensifying) distain for emerging markets. Whereas a decade ago exuberant acronyms, such as BRICs and CIVETS, were coined to create taxonomies of growth market opportunity, today EMs are clustered according to their common failings: hence the newly-formed Fragile Five economies, an aggregate of current account-indebted countries with exacerbated risk to hot-money flows. (This grouping includes India, Indonesia, South Africa, Turkey and Brazil; Argentina might be added a Sick Sixth were it not for the fact that unlike the others, the Latin American economy has been a well-known, decades-long disappointment). Much of that hot money has flowed back to the US and other advanced economies, the S&P alone rose by nearly a third in 2013, its best performance in over 15 years.

Yet, this is far from a zero-sum game. While many emerging economies do suffer from expanding current account deficits, persistent inflation and crushing infrastructure deficits, many more continue to push millions of new consumers into the middle classes, and their corresponding aspirational spending continues to sustain domestic consumption levels across Asia. The Economist Intelligence Unit estimates that emerging Asia will see its economies collectively grow 5.6% in 2014 at PPP ratesroughly twice as fast as the world as a whole (see Figure 1). Moreover, it is growth within and between emerging market regions that is becoming increasingly relevant to global trade, and while confidence has returned to the rich world, there are still concerns. Japans robust economic recovery slowed significantly by the end of 2013; fourth quarter GDP growth rates were a respectable but unexciting

Figure 1Regional GDP and growth rates, 2013-2015(in US$trn, at purchase price parity)

Source: The Economist Intelligence Unit

2013 2014 2015

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