Are Emerging Markets Losing Their Sheen?

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The title might sound a tad extreme but despite all the positive growth signs in Emerging Markets, there is a possibility wherein the emerging markets could face roadblocks going forward.

It is no surprise that emerging markets were the fastest to recover from the economic crisis in 2008 that engulfed the world. Economies in the Asia-Pacific and Latin American region grew the fastest in the period after the recession and continue to grow at a healthier rate.

Indian economy itself grew rather well partly helped by the fiscal stimulus provided by the government. Even in the longer term, emerging markets are expected to grow faster than the developed countries albeit the growth is expected to slow down a bit. According to World Bank,

Economic growth in developing countries will slow to 6.3 per cent in 2011 from 7.3 per cent in 2010

However, Investor sentiments seem to suggest a deviation in the focus towards emerging markets. Investors pulled out $220 Mn from emerging market equity funds last week sending mild distress signals.

Even though the week ended June 1 saw inflows of $820 mln in emerging market equity funds, these funds recorded three outflows in four weeks which could be a negative trend for emerging markets.

Investor community is apparently skeptical of the rising inflation in emerging markets like India and they expect the rising inflation to put brakes on the economy growth.

India Inc. seems to have suffered the most witnessing outflows for the sixth week in continuation. The high inflation has become a cause of worry for India as the authorities struggle to balance industry growth and inflation.

The IIP data suggested significant decline suggesting that the fiscal-policies tightening be re-considered. The tightening of fiscal policies however is required to tame inflation and this has put the regulators in a tough spot. Fiscal policies which can balance growth and inflation are a need of the hour especially in India.

With the possibility of  100 bps rate hike in India, the growth story of India as an emerging market may not appear too bright for the investors.

Further, rising inflation is a concern in pretty much all emerging markets like China, Latin America etc. Despite the fact that these economies are performing relatively better than India at the moment, there are concerns that fiscal policies in these countries need much refinement if these markets are to maintain their growth rate.

The global economic climate itself does not appear too positive and effects of this are expected to pass down to emerging markets as well to a certain extent. With economies in the developed countries still sluggish, emerging markets are key drivers for global economy as well.

Investors pulling out money from emerging market funds could be a short-term aberration but it could very turn into a negative trend for growth prospects of emerging markets. The overall perception of emerging markets continues to remain positive but inflationary concerns are making investors wary.

I don’t have an answer to the inflation conundrum but I hope the regulators and the concerned authorities are able to come up with policies which help tame inflation without comprising on the industry growth.

What are your thoughts on the emerging markets growth story. Could fund outflows be a minor blip on the growth radar of emerging economies or it could become a serious problem going forward?

  1. […] Turn to 2011, and the growth forecasts are being revised on a regular basis. Inflation has been cited as a major hindrance in the context of growth in emerging markets and investors have cited unabated inflation in India as a cause of concern. […]

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