Confidence in emerging markets wanes

Confidence in emerging markets is waning for 2009 as a deteriorating global outlook undermines export demand and hampers growth.

After strong performance from the developing world in 2007, particularly in countries such as Brazil, Russia, India and China (Bric), expectations were that the global financial crisis would have a limited effect on these dynamic economies. This claim was especially held while the price of crude oil, to which both Brazil and Russia’s commodity-heavy economies are particular sensitive, remained on its upwards trajectory in the first six months of 2008.

Julian Chillingworth, the chief investment officer at Rathbones, says the competing pressures of higher inflation and slowing growth has discredited earlier “decoupling” arguments.

The reversal of the commodities story and the near capitulation of stockmarkets in developed economies altered positive feelings towards riskier emerging market assets. Following the collapse of Bear Stearns and Lehman Brothers and government intervention to save AIG, Fannie Mae and Freddie Mac in America, and Bradford & Bingley and Northern Rock in Britain, nervous investors began pulling money back from overseas holdings.

The progressively negative economic situation in major economies provided a double blow to Bric countries as the withdrawal of capital by foreign investors was compounded by softening export demand.

“We felt that commodities and mining would come off the boil and they have,” says James Davies, investment research manager at Chartwell. “If I had to pick something that is rather contrarian I would say Chinese growth will be lower than expected.”

Chillingworth agrees and says the Bric countries no longer offer the haven they appeared to.

“China is the wild card at the moment with analysts predicting [GDP] growth of 6.5% next year which would be problematic for them,” says Chillingworth. “Russia and Brazil are basically commodity plays.”

Evidence for this trend was made apparent by China’s trade figures which show exports from the country fell by 2.2% over November. The monthly fall is the first in seven years and is in stark contrast to October which saw an upturn in exports of 19.1%. Perhaps more worrying for western countries looking for China to prop up demand was that imports dropped by 17.9% in the month.