Emerging-market economies are better equipped to deal with the endgame of the global financial crisis than Western countries. The next decade will see the big emerging markets switch their growth model to trading among their consumer markets, away from the United States and western Europe.
But the extent to which this works depends on a slew of political reforms that too many governments have failed to address, warns Kim Catechis, head of global emerging markets at equities specialist Martin Currie Investment Management.
Edinburgh-based Catechis has been investing in emerging markets throughout his career. Previously at Scottish Widows Investment Partners, where he set up its EM team in 1998, he and his team decamped to Martin Currie this time last year.
“My worry is that India, China and other countries may have missed their window of opportunity to implement basic structural reforms that would have paved the way for another 25 years of growth,” he says.
As a bottom-up stock picker, he is generally not interested in politics per se, but in policymaking.
“If you only read the Financial Times or the Wall Street Journal, you’d think investing in Russia is just about whether Medvedev or Putin is the ruler,” he says. “I don’t care who runs the Kremlin – or Delhi or Beijing – but I must understand their political agenda, to understand the risk to corporate earnings estimates.”
However, he does think geopolitics will play a greater role in securities selection in the next 10-15 years.
“China’s cautiousness is holding back Asia in terms of its labour markets and financial system,” he argues. “Five years ago they should have stepped away from the banks and tried to build a proper financial system. Where does the credit decision lie? The same goes for Russia and India.”
Catechis stresses that he is not advocating a line of Western superiority, or holding up the United Kingdom as the role model. He also acknowledges that emerging markets avoided the credit crunch because they didn’t copy Western financial systems.
However, what has gone neglected is increased independence of central banks, improved property law and enhanced jurisprudence. These are difficult tasks, but the best time to address them is when economies are strong, and before the expectations of burgeoning middle classes become too great.
“Emerging markets have hit a certain ratio of GDP-to-per-capita income that settles basic needs, but expectations have risen further,” Catechis says. “China has a great record of micro-management, but how long will this last? Brazil needs to catch up to 40 years of neglecting its education and infrastructure.”
Naturally, as a professional EM investor, Catechis is bullish on the sector in general. He marvels at how over the past decade these countries have transformed themselves.
“Many of these countries were just a place for multinational corporations to sub-contract grunt work," he notes. "But no one would think of doing that in China now: it’s too expensive. Chinese manufacturers are now looking to automate, and that will create a multi-year effect of higher efficiency and quality control.”
He expects the next decade to see the rise of emerging-market multinationals, whose businesses will shift from exporting to the West to either serving their domestic middle classes or targeting the consumers of other EMs.
“The financial crisis has led to thousands of companies in China being destroyed. The survivors will either turn to domestic demand, or to emerging-market middle-class consumers,” Catechis predicts. “That’s the growth opportunity for the next 10-15 years.”