Private Equity in the Emerging Markets
Many emerging markets, among them China, India, Indonesia, Mexico and South Korea, have announced or embarked upon significant reform measures, encouraging entrepreneurship. Most are also looking to rebalance economic activity away from export and investment-heavy models to become more oriented toward consumer demand.
ASEAN’s (Association of Southeast Asian Nations) economic community planned for 2015, which will bring 10 economically diverse Southeast Asian countries together into a single economic organization, represents another strand of reform in which more technologically advanced emerging economies are becoming increasingly interconnected with less-developed neighbours who possess resources of low-cost labour and commodities, to the potential benefit of both groups.
The reform measures have had some short-term costs, but we believe that, should governments succeed in driving them through, longer-term benefits could soon begin to feed into economic growth figures. The emphasis on market discipline could also create a closer correspondence between emerging-market growth and corporate profitability.
Global growth will accelerate in 2015, supported by a low base, low inflation, low rates, lower oil price and USD 1.5 trillion more in monetary stimulus. The combination of low interest rates and a benign global macro backdrop will be supportive for equities in the year ahead. Frontier markets as an asset class will come of age and Asia will be characterized by reforms.
A number of the key markets in Asia are pursuing important reforms. Most importantly, we believe the Chinese reforms will continue. The opening up of the A-shares market and internationalization of the RMB currency are very important trends to watch.
We believe the newly-elected leaders in India and Indonesia will continue to focus on reforms, as both Prime Minister of India and President of Indonesia were elected on reform tickets.
These reforms are long overdue; India and Indonesia rank 142 and 114 respectively out of 189 countries in the World Bank’s “Doing Business” ranking. So, the to-do list is painfully long, and these initiatives are not easy nor always popular. But we are encouraged by the fact that the drive for reforms is a homegrown realization about their need, rather than pressure from external forces. And the Indian ruling parties reform manifesto is impressively long – including urbanization, investment liberalization and administrative reforms – while the technocratic government in Indonesia has already shown that it is willing, and capable of reforms, by cutting back on expensive fuel subsidies.
A closer look at these countries reveals that the vast majority have a disciplined fiscal policy and a relatively independent monetary policy – strengths that are reflected by their comparatively low rates of inflation. The central banks still hold substantial foreign currency reserves and thus have greater flexibility to manage their currencies.
In view of their new found stability, developing economies and emerging markets are attracting record volumes of foreign direct investment according to the UN Conference for Trade and Development (UNCTAD): The annual growth rate over the past four years was 10%. Foreign direct investment also had a positive impact on local development in the areas of infrastructure, salary growth and tax revenues, as well as in other areas of economic life. Viewed overall, favorable conditions are in place to enable the spiral of success to continue in these emerging markets.
A particularly impressive development in this region is the revival of India’s microfinance market. Central Asia is being impacted by the economic crisis in Russia, leading to a slight slowdown in financial sector development compared to previous years.
According to the International Monetary Fund (IMF), economic growth in the 20 most important microfinance markets will increase from 4.4% to 4.8% in 2015. This means that microfinance countries will probably grow at twice the rate of developed economies.
Outlook LATIN AMERICA
The Latin American Economic Outlook 2017, published by the OECD/UNITED NATIONS/CAF 2016, analyses the attitudes, challenges and opportunities of LATAM`s youth. The report commented on the social and economic progress of the last decade, which had raised expectations among the youth, but such expectations have not been fulfilled. More than 60% of young Latin Americans live in poor or vulnerable households. A third or about 43 million young Latin American have not completed secondary education. Amongst others, this creates a challenge for the region in transitioning into a knowledge-based economy. Deep and prolonged recessions and notable slump in output in various countries explain a generalized slowdown i.e. contractions in GDP growth. Generally, consensus forecast from various research shows that growth prospects are further eroding.
Outlook RUSSIA and EASTERN EUROPE
It seems that the Russian economy absorbed the shocks of lower oil prices and the continuation of Western sanctions with fortitude, contracting just 0.2% in 2016. There are further indications that the nascent economic turnaround continues, as industrial production continue to expand and the manufacturing and services PMIs continue to indicate an expansion. In Eastern and Central Europe, GDP expanded by 2.8% annually in 2016, driven largely by Poland and faster growth in Romania. Tight labor market and fiscal stimulus measures are fueling a consumption boom in Poland and household spending came in at a multi-year high. Possibly the EU-led investment fund cycle will become more favorable, after a sharp drop in investment in the region. 55% of the 11 economies saw upward revision of the region’s growth projections. Romania is projected to be the region’s fastest-growing economy. Bulgaria, Poland and Slovakia are also achieving fast growth rates of above 3%. On the other side of the spectrum, Estonia is expected to be the region’s laggard.
Outlook ASIA & MIDDLE EAST
Real GDP growth in Emerging Asia is expected to remain robust at an average of 6.2% over 2017-21 compared with 6.5% in 2016. The OECD indicates that Private consumption should continue to make a large contribution to growth. Growth in India will remain high, above 7% over the medium term. China’s slowing growth may gradually fall to an average 6% per year over 2017-21. Industrial overcapacity continues to be a challenge and export growth has been weak. Liberalising reforms could help to support robust growth and improve currently weak private investment. It is said that the Asian region will need to pay careful attention to potentially important downside risks to growth, such as slowed growth in trade, increasing prevalence of non-tariff barriers and persistent low interest rates in advanced economies potentially leading to market instability in the banking sector. Growth in the Middle East and North Africa region is estimated to have slowed to below 3% reflecting fiscal consolidation in some countries and oil production constraints in others. Failed ceasefire, ongoing wars, the fight against the Islamic State group, and political crisis in various countries were part of a continued cycle of conflict in the region. This has led to mass displacement, loss of life, and destruction of infrastructure. Cross-border spillovers in the form of disrupted trade, fiscal pressures from spending demands related to refugees and security, and loss of revenues from tourism have caused damage to the region and had international ripple effects. Growth slowed in the Gulf Cooperation Council. Failure of oil prices to follow an expected upward trajectory and an escalation of conflict pose substantial downside risks to growth in the region. Rising conflict-related risks would likely increase economic uncertainty and slow investment. Fiscal and structural reforms could trigger public discontent, with negative effects on confidence, foreign investment, and growth. For GCC countries, the anticipated tightening of monetary policy in the U.S. could pose an indirect risk to growth.
Outlook AFRICA
Africa achieved impressive economic growth over the past 15 years with average real gross domestic product (GDP) rising from just above 2% from the 80s-90s to above 5% in 2001-14. Africa’s growth is adversely affected by headwinds from weaknesses in the global economy and price falls of key commodities, but is supported by domestic demand, improved supply conditions, prudent macroeconomic management and favourable external financial flows. Growth remained highest in East Africa, followed by West Africa and Central Africa, and is lowest in Southern Africa and North Africa. In West Africa, the Ebola epidemic has abated with Guinea, Liberia and Sierra Leone recovering gradually. Monetary policy stances diverged as countries faced different inflationary and currency pressures. However, despite falling commodity prices, Africa’s external financial flows have remained stable overall. Portfolio equity and commercial bank credit flows dried up, reflecting tightening global liquidity and a market sentiment wary of risks. Rising remittances and increased official development assistance largely kept the figures up. It seems that African governments are looking to stabilize financial inflows in the short term and use them for sustained economic diversification for the longer term. Falling resource revenues will mean governments must find ways to broaden their tax base away from oil and commodities.