London: Global emerging markets are enjoying their best boom since Asia’s crisis flattened them a decade ago and with investors eyeing economic fundamentals that argue against a collapse, the rally may yet have years to run.
The overall situation of emerging markets is different from 1997 when a selloff in Asian currencies sparked financial turmoil from Russia to Brazil and required International Monetary Fund (IMF) bailouts worth more than $100 billion (Rs4.3 lakh crore) to help put right.
Globalization and a seemingly endless demand for commodities have transferred jobs and wealth to developing nations on an unprecedented scale, while countries scarred by the crisis have opted for fiscal prudence, floating exchange rates and building foreign currency reserves that may top $3.5 trillion this year.
“If you look at the emerging market universe it’s a different world from ten years ago,” said Julian Mayo, investment director at specialist emerging markets fund firm Charlemagne Capital.
“The big economies—Brazil, Russia, India, China, South Korea, Taiwan, Mexico and South Africa—have made fundamental changes in the way they conduct business, specifically allowing foreign investors to come in and allow a partnership-type structure to develop with foreign investors,” he said.
Capital has flooded in as a result.
IMF, which meets for its annual spring meeting in Washington on 14 April, estimates over $400 billion in private capital flowed to emerging economies in 2006—a four-fold rise since 2002 and dwarfing the $20 billion lent by the Fund.
Emerging markets as a group are running a cumulative current account surplus of about $250 billion, according to World Bank data for 2005, in sharp contrast to a deficit of about $90 billion around the time of the 1997 crisis.
This new economic independence and the stronger market-based relationship with private sector investors calls the role of IMF—created 60 years ago to help handle crises—into question for many emerging market analysts. Its future role will be a focus of reform talks at the organization over the weekend.
At the very least it makes them confident that crises on 1997’s scale are a thing of the past, believing that investors are more sophisticated and countries themselves better equipped to defend against speculators than before.
“The markets have really done the IMF’s job in terms of forcing emerging countries to focus on macro fundamentals and fiscal prudence,” said Josef Karasin, head of emerging markets research at investment consultancy IDEAGlobal.
Certainly emerging markets have merely stalled when growth or inflation risks have sparked any sudden shift into safe haven plays at any time in the past 12 months. They have remained calm even in the face of a slowdown in the US economy—their traditional engine of growth.
Indeed prices have raced to fresh highs this week as investors rushed in to buy after global risk assets were knocked lower in the latest global wobble.
That in itself has ignited concerns among regulators and policymakers that investors are too sanguine, borrowing huge amounts in low-yielding currencies to fund higher-returning—and higher risk—emerging market investments.
“Comparisons with the bubble-type valuations of the 1990s can be very misleading,” argues Mayo. “If you look at the asset class now, emerging markets trade at around 12 times earnings whereas they used to trade at over 20 times their earnings in the past 12-13 years.
“The main comfort is that there is still huge value in these markets even though there is lots of money in there,” he said.
Veteran emerging markets investor Mark Mobius, who runs $50 billion at Franklin Templeton, tends to agree.
“Valuations seem to be OK in current circumstances when countries are growing at a pretty good pace,” Mobius said.
But IMF this week said financial market risks had increased, singling out US mortgage worries, booming credit growth in emerging countries and a recent wave of corporate buyouts as possible triggers for the re-appraisal of risk.
And while sovereign indebtedness has been falling, corporate borrowing is at record highs, rising almost six fold between 2002 and 2006, and consumer lending has also burgeoned.
Even if there is an emerging markets crash, many analysts believe IMF won’t play a big role in resolving it. Bitter memories of stringent IMF austerity measures during previous crises and the subsequent years of recession, made many countries determined to tackle future problems without IMF help. Former debtor Argentina for instance has repaid IMF loans, borrowing instead from neighbour Venezuela.
“One reason for having lots of reserves is never having to depend again on an outside institution like the IMF,” said Tim Condon, head of emerging markets at ING in Singapore.
“I don’t see the vulnerability there that could lead to a crisis and I don’t see a whole lot of scope for the IMF to be pressed into service again,” he said. REUTERS