Developing markets looking brighter

While Europe is facing a multi year slog out of the economic crisis, emerging markets are attracting more attention from investors, though experts say they won’t be able to grow if the developed economies slow down.

In the months leading up to the summer holiday season Europe was gripped by fear that it would be overwhelmed by debt. There was much talk of Greece, or Ireland, or even Spain defaulting on their debts. This opened up the bleak scenario of the Eurozone collapsing and dragging down the world economy just as it was recovering from recession. But a bailout package or two later and investors started to focus their attention on the other big problem, the precarious state of the US economy, with Janet Henry, a chief economist at HSBC Europe, saying a long term nature of the crisis is now becoming evident.

“Over the summer the market started focusing on concerns over a double-dip in the US and the fact that German growth was coming through very strongly, and that she was quite slow to realize that the sovereign crisis in the Eurozone had never actually gone away. Spreads were rising over the summer, particularly in August when we had all the concerns coming through about the cost of resolving the financial sector crisis in Ireland and, I think, now we are in the situation when markets realize this isn’t a one year problem, it’s a multi-year problem.”

While Europe is busy cutting its way out of crisis, much to the displeasure of the continent’s public sector workers, and the data from the US is anything but comforting, investors are looking for the next growth areas. Top of that list appears to be the BRIC countries of Brazil, Russia, India and China.

But according to Elina Rybakova, a chief economist at Citi Group in Russia, being still not big enough, emerging economies won’t be able to perform well if the developed nations start going into reverse again.

“If, indeed, there’s a second wave, a second shock in the US and Europe emerging markets won’t be able to sustain their growth because of a large share of trade and capital flows still are linked to the US and Europe. And therefore the inter-regional trade in the emerging markets is still very small and if the demand in the us and Europe tanks completely, then the emerging markets will no longer be able to export a big chunk of their goods and we’ll see a freeze up in the trade exchange and therefore slowdown in growth.”

In short, the emerging economies do not have the consumers to decouple – they will not make it alone. But given a more moderate outlook where the US and Europe can sustain some growth, then the emerging markets look set to outperform. This is clearly what many investors are expecting and is likely to be reflected by money flowing towards the new markets.