Continuing our series on frontier and emerging markets, we focus here on the complexities of emerging markets and their impact on the economy as a whole.
A lot has happened since the 2008 Beijing Olympics. China, which announced itself to the world, at that time, as the emerging superpower and has since been the focus of global investment, could now potentially trigger another downward turn in the global economy.
You may have seen last month that the IMF announced that the outlook for the global economy has worsened, downgrading its growth predictions by 0.2% for 2015 and 2016, to 3.1% and 3.6% respectively – perilously close to the recession rate of 3.0%.
With these worrying signs of continued financial difficulties, companies are looking for an explanation for the potential deceleration in growth. An answer can be found in the impact of emerging markets on the global economy through their slowing growth and increasing debt.
The IMF, in its bi-annual Global Stability Report, notes that emerging markets have raised a debt of over $18 trillion from borrowing. This large figure arose as private firms took advantage of the accommodating environment to borrow money from developed economies at ultra-low interest rates. This has consequently led to a debt which is quadruple what it was in 2004 and so, what was once an attractive offer for emerging markets has become the crux of global vulnerability.
Investment in emerging markets is tied to their high growth potential and, of course, with this potential comes significant risk. Having attracted investment from developed economies globally, we now see a widespread impact on the global economy. An environment which previously favoured growth and upward investment has led to a mutual economic dependence. It is reported that £79 billion in value has been lost by British businesses alone due to their investments in Asia and particularly China.
China continues to exert a sometimes hard-to-predict influence on the global economy. Having reached unprecedented stock highs in June, China took a turn and plummeted to unexpected lows, sending huge shockwaves throughout the global economy. Effects have largely been felt by those companies with higher exposure to the commodities markets. Glencore has suffered a £20 billion loss in value and similar firms such as Anglo American and BHP Billiton have had huge hits to their share prices – quite an impact for an economy which is still not classified as developed.
The slowdown in emerging market growth highlights these markets’ importance to the rest of the world. Whilst they are not stable enough to qualify as developed economies, and their attraction to investors relies on their prospects for potential and the accompanying threat posed by volatility, evidently global economic success is connected to investments in these countries. Consequently, we have created a global economy so intertwined – like a tangled ball of wool, where the beginnings and ends of threads disappear – that surely the descriptors of emerging and frontier markets make little sense. Perhaps categories should take into account the countries which invest in these markets and thus will be most vulnerable to fluctuations in the economy.
However, it should be noted that last month the MSCI reconsidered their index by allowing companies to be featured in the index in the country in which they operate, despite being actually listed elsewhere. China is home to Alibaba, Baidu and JD.com - just a few names of the consumer and tech stocks which will make up 14% of the new total index weight; this will have a significant impact on China’s rating. This also highlights the effects of investment in emerging and frontier markets.
It is evident, therefore, that whilst an entwined global economy can be generally detrimental on a global scale, individual economies still have a great impact on determining the broader effect. Perhaps what we should take from this is that we shouldn’t underestimate frontier markets and should appreciate the reality of living in a global economy. Similarly we should appreciate that sound concepts do not always translate into durable investments. At RSM, we appreciate the effect of a globally unified economy by being prepared to tackle all the international challenges which our clients may face.