Are the Developing markets the saviours for the global economy?

The developing markets were considered the poor cousins of the developed economies. However with the passage of time it was realized these countries had the potential to provide a fresh impetus to economic growth in world markets. The allure of these countries was further enhanced when economists from Goldman Sachs coined the term BRICS (Brazil, Russia, India and China).These countries had all the right ingredients-huge populations, rising income levels and low penetration of necessary services like banking which made them attractive investment avenues.

The potential of these markets was further magnified when noted fund managers like Jim Rogers and Mark Mobius, the "Indiana Jones" of the financial markets stressed the return potential offered by these markets to foreign investors. The emerging markets have well and truly picked up the baton of economic growth from the developed world and gone on from strength to strength. The pace of growth in these economies has been stunning, using an adjective like "bewildering" to also describe the pace of economic growth is not entirely misplaced.

A recent report released by the World Bank confirmed what most people in the investment fraternity have believed for long. World Bank estimates show a big dichotomy in growth expectations, which can be seen by the following table:








Its no wonder the top performing equity markets globally are the emerging markets. This can be attributed to expectations of these countries filling in for slumping demand from the developed world and helping the global economy extricate itself from possibly the sharpest slump in economic activity since World War II. The following table shows year to date performance of equity markets across different regions:














Source: Bloomberg, as of June 25 2009


However it is very easy to get carried away and extrapolate the growth prospects for these economies. One needs to be a bit more circumspect when evaluating returns potential. The BRIC countries have had their share of problems for example India grapples with a high fiscal deficit and is vulnerable to any spike in commodity prices, most notably crude oil. Uncertainty over the monsoon could slightly dampen expectations, it remains to be seen how the situation evolves over the next month or so. The latest move to bailout Air India could further widen the fiscal deficit. India can ill afford largesse like these.

The emerging markets hold tremendous growth potential and should continue to provide traction to the wheels of the global economy in the future.