Markets & Economy
Where are emerging markets headed?
May 09, 2014
Catherine Gordon: Joe, how are the emerging markets doing lately and which countries are you watching most closely?
Joe Davis: Well, I think on the economic front, emerging markets have done better in the past than they are doing now. We've seen a slowdown in everywhere from Russia and India to Brazil and clearly China, which has been intentional and that's, in our minds, permanent. I mean, China is likely to grow 7% this year and that could very well be the case for the next several years, from the double-digit growth rates they had.
I think that's important to keep in context because with China's slowdown and with the United States, the Federal Reserve, the tapering program, I think it's those two areas that have put some pressure on certain select emerging market economies. But right now, it is idiosyncratic rather than systemic across the board. And so it's areas that we're watching such as the Brazils, the Indias, the Indonesias, the Turkeys, the South Africas. And there's some really good analysis done internally by our fixed income group that closely monitors those individual countries from a credit risk standpoint.
But holistically, we still believe that although there are similarities with the emerging market crisis of the 1990s, such as declining competitiveness, weak commodity prices—which I think could be with us for some time—and just much slower credit growth. But at the same time, there are important differences from that period. And those differences include much stronger foreign currency reserves, which may be needed in some select countries. You have just lower number of currency pegs, and so in fact, those currencies of those countries I mentioned have depreciated significantly. And rare in human history have we had currency declines more than what we've already seen.
So I think some of that adjustment process, although painful, that is actually occurring is a healthy thing, so it's unlikely to spill over to developed markets. If anything, it's the developed markets and China that are key to that risk being contained.
Catherine Gordon: So idiosyncratic, not systemic?
Joe Davis: Yes.
Catherine Gordon: Great, thanks.
All investing is subject to risk, including the possible loss of the money you invest.
Investments in stocks issued by non-U.S. companies are subject to risks including country/regional risk, which is the chance that political upheaval, financial troubles, or natural disasters will adversely affect the value of securities issues by companies in foreign countries or regions; and currency risk, which is the chance that the value of a foreign investment, measured in U.S. dollars, will decrease because of unfavorable changes in currency exchange rates.
Stocks of companies in emerging markets are subject to national and regional political and economic risks and to the risk of currency fluctuations. These risks are especially high in emerging markets.
© 2014 The Vanguard Group, Inc. All rights reserved.
A quick update on emerging markets from Chief Economist Joe Davis
Many emerging markets have struggled recently. Will they continue to underperform? Chief Economist Joseph H. Davis, Ph.D., focuses on some key emerging markets around the world.
Also of interest:
- Is the global recovery on track?
- What's ahead for interest rates?
- Time for optimism in Europe?
- Is China headed for a slowdown?
- How to manage "country risk"
- All investing is subject to risk, including the possible loss of the money you invest.