Presentation on theme: "The Changing Outlook for Emerging Economies Piero Ghezzi Head of Economic and Emerging Market Research March 2010 PLEASE SEE ANALYST CERTIFICATION AND."— Presentation transcript:
The Changing Outlook for Emerging Economies Piero Ghezzi Head of Economic and Emerging Market Research March 2010 PLEASE SEE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES AT THE END OF THIS PRESENTATION.
22 2009 was a milestone year The 2008-09 recession was the largest post-war downturn but EM economies held reasonably well Note: GDP gap for past crises estimated using by gap between actual GDP and GDP assuming growth at the potential rate since the beginning of the recession. EM Crisis include Argentina, Brazil, Mexico, Thailand, Korea and Singapore. Source: Haver, Barclays Capital.
3 What was different in EM this time? Source: World Bank, IMF, Barclays Capital Reduced dependence on external finance and large liquidity war chests have strengthened the ability to engage in countercyclical policies Embrace of macroeconomic stability by local governments after hard lessons from the 70s and 80s have resulted in more fiscal discipline and credible monetary policy Building the liquidity war chest Low inflation and better fiscal ratios Source: BIS, Barclays Capital RHS
4 EM was able to administer counter-cyclical policies Source: National Central Banks, Haver Analytics, Barclays Capital Note: For AEM Economies Improved fundamentals allowed EM to undertake counter-cyclical monetary (almost everywhere) and fiscal (in many cases) policies Change in the cyclically adjusted fiscal deficit during the Asian and global financial crisis Aggressive countercyclical monetary policies when they were needed the most Source: National Treasury Offices, IMF, Haver Analytics, Barclays Capital Note: For AEM Economies
5 Increased dependence on China also mattered.. EM Growth (ex-China) is less sensitive to G7 growth, more to Chinese growth ___________________________ Source: IMF, Barclays Capital. Note: EM growth was regressed on G7 and China GDP growth Less Sensitivity to G7 Growth, More to China Chinas share of global commodity consumption growth ___________________________ Source: Bloomberg, Barclays Capital
6 …and China recovered extremely rapidly Source: Bloomberg, Barclays Capital A V shaped recovery in China End of recession timeline Source: Barclays Capital
7 Self-reinforcing negative EM dynamics of the past were avoided ___________________________ Source: Bloomberg, Barclays Capital. Value of $100 Invested in January 2004
8 Its not only EMs advance… … but also the decline of developed markets. EM countries economic Sharpe ratios have more than doubled ___________________________ Source: IMF, Barclays Capital. Better Relative Growth Sharpe in EM … EarlyLateEarlyLate Mean 4.20%3.68%2.10%1.20% Vol. 3.77%3.17%1.30%2.24% Sharpe Ratio220.127.116.110.68 Period : Growth Rate (EM Median)(G7 Median)
9 Many EM Countries show high growth and low volatility ___________________________ Source: Barclays Capital. Growth Sharpe Ratios (1997–2009)
10 EM is getting a bigger slice of the GDP pie (I) ___________________________ Source: IMF, Barclays Capital. EM share of world GDP continues to increase
11 EM is getting a bigger slice of the GDP pie (II) ___________________________ Source: Barclays Capital. EM Contribution to Global Growth
12 EM is getting a bigger slice of the AUM pie (III)… There has been a structural reallocation of money into EM ___________________________ Source: EPFR Global, ICI, Barclays Capital. Note: EM and Developed flows include both bonds and equities
13 …consistent with improved returns of including EM in Global Portfolios ___________________________ Source: Bloomberg, Barclays Capital. Note: Median values in EM alphas and betas from country-by-country regressions against a short DXY position (FX) and MSCI World total returns. The equity sample includes the top ten EM markets based on market cap. In Adding EM to the global portfolio: MSCI World includes developed countries. MSCI Global includes developed and emerging countries. Mean is the average of the m/m TR (capital return for equities) over the sample period (Jan 05 to Feb 10). Volatilities (non annualized) are the standard deviations of the return series over the same sample period 1.70% of MSCI World and 30% of MSCI EM. 2.G6 treasuries (G7 ex US) 3.Equally weighted US corps, G6 tsy, G7 and EM Corp and Sov. 4.Equally weighted long AUD-CAD-NZD-NOK position. 5.50% short DXY, 25% long G10 comm, and 25% long GEMS. EquityCreditFX MSCI WorldMSCI GlobalPortfolio (1) US IG Corps G6 tsy (2) Portfolio (3) Short DXY G10 comm (4) Portfolio (5) Mean 0.12%0.21%0.34%0.42%0.38%0.50%0.05%0.20%0.25% Vol5.03%5.26%5.59%2.10%2.46%2.28%2.54%3.44%2.58%
14 Looking forward… 1.Important to continue limiting vulnerabilities 2.Some thoughts on growth
15 Limiting Vulnerabilities: Fiscal Policy ___________________________ Source: IMF, Haver Analytics, Barclays Capital. Increase in Public Debt (% GDP) from 2008 to 2009Commodity Revenue (% Total Gov. Revenue) ___________________________ Source: Haver Analytics, Barclays Capital. Fiscal deterioration has been greater in advanced economies but EM countries remain very dependent on commodities
16 Limiting Vulnerabilities: Monetary Policy ___________________________ Source: IMF, Bloomberg, Barclays Capital. Hitting inflation targets has been difficultFood weight in the CPI (%) ___________________________ Source: Haver Analytics, IMF, Barclays Capital. NB: max, min and mean of 6mma deviations of inflation from mid target. Lower and upper targets show the deviations to the limits of the inflation bands Need to rethink inflation targeting regimes
17 Limiting Vulnerabilities: Credit and Asset Prices ___________________________ Source: Haver Analytics, Barclays Capital. Excess money growth and the stock exchange Excess money growth and the property prices ___________________________ Source: Haver Analytics, Barclays Capital. Correlation is too high to ignore
18 Limiting Vulnerabilities: Reserve accumulation ___________________________ Source: IMF, Barclays Capital. EM External debt and reserve accumulation… …but Global Imbalances a problem ___________________________ Source: Barclays Capital. Current Account Accumulation of net foreign assets has worked well for individual countries although inefficient for the world
19 Growth: Difference between two regions is remarkable ___________________________ Source: IMF, Haver Analytics, Barclays Capital. Real GDP Growth (% y/y)…Savings and Investment (% GDP) ___________________________ Source: IMF, Barclays Capital.
20 Growth: Intra Regional differences key in Asia ___________________________ Source: IMF, Haver Analytics, Barclays Capital. Growth is now dominated by China and India……And the recent increase in investment as well ___________________________ Source: World Bank, Barclays Capital. Asia is not as homogeneous as one would think
21 Growth: Demographics will accentuate intra Asia differences ___________________________ Source: CIA World Factbook, Barclays Capital Outside South Asia birth rate below replacementBy 2020, populations in North Asia will have peaked ___________________________ Source: United Nations, Barclays Capital.
22 LatAm Growth: Brazil has gained weight relative to Mexico Latin American growth composition ___________________________ Source: IMF, Barclays Capital.
23 Latam Growth: larger economies save too little… ___________________________ Source: World Bank, Barclays Capital Gross domestic savings in Latam (% GDP)Fixed Investment in Latam (% GDP) ___________________________ Source: World Bank, Barclays Capital.
24.. and the region needs to live with worsening CA balances ___________________________ Source: IMF, Barclays Capital Latin American Current Account (% GDP)
25 Latam: Composition of foreign liabilities is improving ___________________________ Source: IMF, Haver Analytics, Barclays Capital. LatAm Foreign Liabilities (USD bn)
26 Analyst Certification and Important Disclosures Analyst Certification(s) I, Piero Ghezzi, hereby certify (1) that the views expressed in this research report accurately reflect my personal views about any or all of the subject securities or issuers referred to in this research report and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report. Important Disclosures For current important disclosures regarding companies that are the subject of this research report, please send a written request to: Barclays Capital Research Compliance, 745 Seventh Avenue, 17th Floor, New York, NY 10019 or refer to https://ecommerce.barcap.com/research/cgi-bin/all/disclosuresSearch.pl or call 212-526-1072. Barclays Capital does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Barclays Capital may have a conflict of interest that could affect the objectivity of this report. Any reference to Barclays Capital includes its affiliates. Barclays Capital and/or an affiliate thereof (the "firm") regularly trades, generally deals as principal and generally provides liquidity (as market maker or otherwise) in the debt securities that are the subject of this research report (and related derivatives thereof). The firm's proprietary trading accounts may have either a long and / or short position in such securities and / or derivative instruments, which may pose a conflict with the interests of investing customers. Where permitted and subject to appropriate information barrier restrictions, the firm's fixed income research analysts regularly interact with its trading desk personnel to determine current prices of fixed income securities. The firm's fixed income research analyst(s) receive compensation based on various factors including, but not limited to, the quality of their work, the overall performance of the firm (including the profitability of the investment banking department), the profitability and revenues of the Fixed Income Division and the outstanding principal amount and trading value of, the profitability of, and the potential interest of the firms investing clients in research with respect to, the asset class covered by the analyst. To the extent that any historical pricing information was obtained from Barclays Capital trading desks, the firm makes no representation that it is accurate or complete. All levels, prices and spreads are historical and do not represent current market levels, prices or spreads, some or all of which may have changed since the publication of this document. Barclays Capital produces a variety of research products including, but not limited to, fundamental analysis, equity-linked analysis, quantitative analysis, and trade ideas. Recommendations contained in one type of research product may differ from recommendations contained in other types of research products, whether as a result of differing time horizons, methodologies, or otherwise.