Emerging markets still bucking downturn

The credit crisis that has laid waste to so many investor portfolios may be global, but it has not derailed the engine of economic growth in the most powerful emerging markets, according to speakers at the Independent Financial Brokers’ Spring Summit in Toronto.

“I would suggest that the emerging markets are one of the best paths to making money over the long term,” said Levi Folk, emerging markets economist with Excel Fund Management. “The compelling reason for investing in emerging markets is the opportunity to achieve strong growth.”

He pointed to Goldman Sachs estimates that predict China will become the largest economy by 2050, with India third after the U.S., and Brazil and Russia ranking fifth and sixth, respectively.

“The story behind this is partly a story of urbanization,” Folk said. “Every decade you will see multiple multi-million person cities showing up in China and India. There will be 350 million people living in urban centres in China by 2025.”

Indeed, there are few signs the current global slowdown will impede the mass-migration from rural areas to cities in both China and India. Urban economies tend to be more productive than agrarian societies, as populations take on industrial employment.

“The proposition of urban migration is a good one,” Folk said. “It suggests that productivity will continue to rise in emerging markets for the simple reason that when you produce something in an urban centre with a machine, you’re more productive than if you produce something in a rural setting, say, pushing a plough.”

As urban populations swell and production increases, incomes rise alongside. Cost of living increases will undoubtedly follow income inflation, but even if the average Chinese consumer has little additional discretionary income, the amount spent on housing and staples will drive the economy.

While growth has slowed in the emerging markets, those economies have not stalled. Despite dramatic slowing, China’s economic expansion remains in the high single digits.

Economic growth may also improve living conditions in emerging markets, as the governments recognize growth can happen faster if the populace is healthier and better educated.

Both China and India continue to have high savings rates, which stems from the relative lack of social services provided by their governments. Should those states step in to provide lower-cost education and health services, the Indian and Chinese middle classes will no longer need to hoard their wealth, and may become more comfortable spending on consumer goods.

“The government [of China] realizes that they need to be able to provide more social services and they need to do it quickly, because they need to get people spending,” Folk said. “They can’t rely on the United States anymore to consume all their products.”

Infrastructure remains another crucial spending priority for the governments of India and China, as it’s an obvious choke-point for economic growth. Without adequate power supplies or road systems, a modern industrial economy simply can’t function.

“They have to be able to spend money on infrastructure in order to grow,” Folk pointed out. “We think that’s an excellent investment opportunity over the long term. It’s not a new idea, and you’re hearing it all over the place, but it is a real [opportunity] and it is something that is happening right now.”

Despite the global and domestic slowdown, the government of China, rich with foreign reserves, has allocated close to 15% of GDP to infrastructure investment.

“In Canada you’re amazed when it seems a building goes up overnight. In China, it seems like a whole city can go up overnight,” he said. “The opportunity is there for stronger growth, stronger productivity, infrastructure building — those are all factors that are going to be in place over the next 10 or 20 years.

“There’s been a pause, if you will, we’ve had a problem with the global economy, but I don’t think it’s changed the emerging market story at all,” he said. “It was a good test this year to see what could or would happen.”

(05/26/09)