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Eric Morin, senior analyst, CIBC Asset Management.
Asset classes for emerging markets are attractive mostly for two reasons over the long run. The first one is that emerging markets will continue to be facing a better long-term economic fundamental prospect than advanced economies, with an increasing role for the consumer and smaller debt loads than for advanced economies.
So, when we say that a long-term macro prospect are better for EMs, one of the key pillars for that is the increasing role for the consumer. It’s important to point out that emerging economies have made a considerable progress in transitioning away from excessive reliance on exports and commodities. And the positive consequences for that was an increasing role for the consumer and the tertiary sector now in emerging markets accounts for about 70% of the stock exchange in emerging market.
This is similar to developed market. This is important because the consumer is a more stable source of growth.
[That’s compared to] exports and investment, and also it’s more responsive to policy changes because, before, investments and exports were driven mostly for EMs by foreign factors. So down the road, lower rates will be supportive of the EM consumer.
The other factor is that the EM countries typically have much smaller debt loads [and] much smaller debt servicing cost as a share of GDP than advanced economies. So the lingering headwind of debt that we have for advanced economies won’t be there for most EM economies. So overall long-term prospect are better for emerging market economies and this will be reflected in their risky assets. The second reason is that emerging market asset classes are less risky than they used to be. That is because they rely less on external funding than they used to do. This, again, is [because] their growth profile is less dependent on volatile investment and exports. And last but not least, they made several structural reforms which are positive for growth, on one hand. On the other, they have those reforms that have reduced vulnerabilities and imbalances of emerging market economies.
So EM market economies are more attractive over the long run than they were in January and a year ago because of the price correction, the attractiveness of the BIS in Asia and, over the long run, because their econom[ies] are more diversified. Also to rely more on [technology] production and investment. Those economies have also implemented many structural reforms and some of them will have their growth landscape driven by foreign direct investment [in] infrastructure.
So, Asia is the bright spot in emerging market. From a relative perspective, Latin America is the least attractive, so it’s less attractive than Asia for a few reasons. The first one is [Latin America’s] economy is less diversified, to have more dependence on oil and other commodities, and also [the region] has a larger external funding needs than emerging Asia economies, and to have also a less reserves as a share of the GDP. [That] makes them potentially less resilient to adverse global macroeconomic shocks than the emerging markets countries in Asia.