While most of the focus lately seems to be on the U.S. and European economies, emerging markets are slowly starting to show some signs of life. If the global economy is going to stage a recovery, emerging markets may hold the key. The world seems fixated on the Federal Reserve and whether they will or won't hike rates by a quarter point and the impact of BREXIT. Much more attention needs to be shifted to emerging markets.
Emerging market countries possess securities markets that are progressing toward, but have not yet reached, the standards of developed nations. The four largest emerging market countries are known as BRIC (Brazil, Russia, India & China) followed by Mexico, Indonesia, Turkey & Saudi Arabia. While a country like India is already an enormous economy, they are just scratching the surface of their potential.
While advanced/developed economies have seen minimal GDP growth the last four years, many emerging market countries have experienced contractions. Many remain export heavy economies which rely on commodities (oil, wheat, gold, natural gas etc). The violent crash in commodity prices from late 2014 through early 2016 put pressure on many emerging markets. The asset class has seen negative returns in 4 of the last 5 years but, so far in 2016, emerging markets are showing much better returns and are well above most international indices.
The importance of emerging markets in the global economy can not be forgotten. Historically they are export focused economies but as they grow and develop, they can turn into consumption driven economies. This makes the long term growth potential very high. For example, less than 300 motor vehicles are owned per thousand people in each BRIC country with India coming in at only 18 cars per thousand people! Another example, less than 106 computers are owned per thousand in each BRIC country. The opportunity for global growth and expansion is enormous. According to the IMF, emerging markets share of global GDP hit 50.4% in 2013 and that was up from 31% in 1980.
Most emerging market countries sport low debt levels and are able to grow rather quickly. Couple that with a young population demographic and further advances in technology and that should lead to an increase in productivity and spur further economic growth. Of course many risks still exist, such as political unrest, currency fluctuation and inflation to name a few. The risks and volatility in emerging markets can be extreme but if commodity prices continue to stabilize could the next big global growth driver come from "the other guys”?