Asian growth to defy debt gloom

The investing world has gone topsy-turvy.

The “BRICs” economies—the collective name for the world’s fastest-growing large emerging market economies: Brazil, Russia, India, China and (sometimes) South Africa—are poised to bail out the debt-weary economies of Europe, news reports suggest.

It’s a remarkable reversal of fortunes. In the late 1990s, Brazil and Russia grappled with currency issues, India and China were struggling to embrace the free-market and South Africa was wracked by unemployment and internal conflict.

Yet fast-growing emerging market equities have been unfairly punished by investors in recent months, as debt fears in the U.S. and Europe have weighed down equity markets. From July 31 to Oct. 17, the S&P 500 has slipped 7.1% in value while the MSCI Europe Index has shed 14.5% during the same period.

The MSCI Emerging Markets Index, meanwhile, tumbled 17.3% in value during this time—despite the fact these resilient markets are little impacted by events in distant Athens and Washington, D.C.

To me, the European debt situation does not seem as serious as the U.S. debt crisis, both in terms of scale and the possible impact on the global economy. As such, I believe the world’s focus should really be on America.

The tolerance for debt is generally affected by investor confidence levels. Therefore, we must focus on reinstating confidence, which may be impacted if debt levels rise.

As I see it, the problems surrounding the U.S. debt situation have placed greater emphasis on the potential of emerging markets. On the average all emerging countries have lower debt-to-GDP ratios and larger foreign reserves than the average for developed countries.

China, for example, has a debt-to-GDP ratio of under 20% and a whopping $3.2 trillion (U.S.) in reserves. In contrast, the U.S. has a debt-to-GDP ratio of 100% and $143 billion in reserves. While there is some concern the U.S. may slip into a recession before year end, China’s economy will cool to a steamy 9.5% in 2011. Within five years, the International Monetary Fund predicts China will replace the U.S. as the world’s largest economy.

I believe the European debt crisis alone is unlikely to cause a global recession, because we are seeing continued growth for many countries around the world. The IMF forecasts that, as a whole, emerging economies will grow 6.6% this year, three times faster than the 2.2% growth projected for developed countries. Increasing consumption and per capita incomes, especially in emerging markets, continue to drive our focus on the consumer and commodities sectors.

The emerging economies are proving to be nimble and resilient. So far, we have seen no significant impact of developed market debt problems on emerging economies, including Asia’s export-driven markets.

We expect Asia’s exports to grow and likely remain the engines of the region’s prospects. We must remember that despite the concerns about European sovereign debt, the region continues to consume.

Also, Asian countries have become less dependent on the U.S. and European export markets. In many of these countries, the U.S. and Europe are no longer the largest export destination. For example, 41% of China’s exports and 58% of Thailand’s exports have gone to other Asian countries.

In general, the short-term impact on emerging markets has been similar to the impact on other world markets—confusion, volatility and a loss of investor confidence. Over the long term, however, I strongly believe the best emerging market stocks will outperform their global counterparts.

It’s a great time to be a value investor. From Beijing to Buenos Aires, my team are finding promising stocks trading near price-to-earnings ratios not seen since the 1980s.

While the news media and pundits are focused on short-term noise, we are looking ahead to long-term future growth. Yes, it’s impossible to time the market, but I would argue the autumn of 2011 is an opportunity for investors to begin increasing their exposure to the emerging markets at bargain prices. For those who have no exposure to emerging market stocks, now is a good time to start a dollar-averaging program.

Mark Mobius is executive chairman, Templeton Emerging Markets Group