Emerging Markets: Reconsidering Emerging Definitions by Robert Horrocks, PhD, Matthews Asia
While the term “emerging markets” first began as an optimistic label, it may be losing its value. Indeed, there are perhaps better ways to view the world of investment opportunities. Now, in the minds of most investors, the term “emerging markets” often seems to be followed by the word “crisis.” The phrase became a euphemism for “risky” or “unfamiliar.”
However, after our own developed market crisis and the troubles of the Eurozone, it seems a little arrogant to still be using “emerging market” as a backhanded compliment: “You look great, for your stage of development…” As soon as the phrase began to be used in benchmarks, it was stuck for all eternity. Even if countries improved their capital markets, grew richer, and adopted many of the institutional reforms that the West wanted, they still appear stuck in a binary mud—emerging or developed. The term did not adapt to the very changes it purported to foresee; it did not allow for countries’ actual emergingness!
The notion of “emerging” lumps together many different economies: socialist and capitalist; democratic and authoritarian; commodity producers and manufacturers. Most bizarrely, given the original meaning, it treats those countries, that have successfully closed the gap in living standards with the “developed” nations (and the many other countries that have merely kept pace with the U.S.) as one homogenous group.
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These countries that have consistently narrowed the gap were almost exclusively from Asia. And that is why we continue to focus on Asia as a region—for, it is not only home to half the world’s population but it has put in place the building blocks for faster economic growth and has a proven track record at achieving that growth. Asia is starting to behave more like an economic bloc, with closer integration of economies through cross-border trade and investment. Consequently, with each passing year, Asia is becoming increasingly important for the global economy and global politics.
We suspect these trends will endure. The reasons for Asia’s success are: higher savings rates; higher manufacturing share of GDP; and greater openness to trade and new ideas. All these elements combine to higher rates of sustainable productivity growth and, therefore, rising wages, rising living standards, and more opportunities for business investment.
These are the building blocks of growth. They are not unknown to economic theory. They are just hard to implement.
But we can go even further, because from within Asia, a new economic giant is rising. China is now 15% of Global GDP of US$75 trillion and is already on its way to becoming a separate asset class (especially for equities, and over time, for fixed income). Much like in the U.S., investors (especially in Asia, in China) will probably start asking for investment options related to China Small, Growth, Value, etc. The growth of the markets and domestic economy, improving returns on investment, and increased accessibility and liquidity of the markets, and broader diversity of the businesses (especially those that are domestically oriented) are probably all factors that help shape the concept of an asset class.
Further, China is applying to be part of International Monetary Fund’s Special Drawing Rights (SDR) currency basket. If its candidacy is approved, it would attain (official) de facto reserve currency status. For an “emerging market” to also be a global reserve currency may put some stress on the “emerging” framework. Finally, should China become part of the global bond indices, we estimate it would be the third-largest weight, after U.S. and Japan.
It is time to think of the investment globe as split geographically, not as a split between developed and emerging.
Robert Horrocks, PhD
Chief Investment Officer