Emerging Markets falling between the cracks (and BRICS)

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The distinction between developed, emerging, in transition and frontier economies has in the past 10-15 years become somewhat more blurred and arguably misleading, in my view, for a number of reasons. For starters it’s a very subjective definition. Secondly, it’s a fluid set of groupings. Finally sell-side institutions (and in some cases countries themselves) have been conservative in redefining the boundaries. 

In response to these challenges, market participants have divided this broad EM grouping into more manageable (and arguably marketable) sub-groups, such as the BRICS, MINT and CIVETS. But even BRICS, which has proved a remarkably enduring acronym, is showing signs of ageing due in part to the divergence in economic performance of its component countries.

As importantly a number of countries, such as Thailand and the Philippines, are either not included in any of these or only included in one sub-grouping, despite their economies and asset classes having performed well in recent years. Furthermore, none of these acronyms include central and east European economies such as Hungary, Poland and Romania.

 

Blurred distinction between developed, emerging, in transition and frontier economies

First, defining what constitutes an emerging market remains a very subjective exercise, even amongst international organisations. The IMF does not have specific criteria to delineate advanced economies from other economies. The World Bank uses Gross National Income (GNI) as its metric to separate high income economies from medium and low-income economies. The United Nations takes a more qualitative approach, with its Human Development Index (HDI) capturing life expectancy, education, and income indices (see Figure 1).

Russia is a case in point: the IMF does not qualify it as developed, the UN has it amongst the transition economies but the World Bank’s criteria puts in the high-income category. Saudi Arabia is another interesting example. It’s clearly a high income country thanks to the world’s largest oil reserves and its HDI ranks 34th globally by the UN (not that far behind Italy). However, the United Nations Conference on Trade & Development (UNCTD) describes Saudi Arabia as developing (due partly to very uneven standards of living).

While the IMF describes 35 countries as advanced, the World Bank classifies more than twice as many (75 to be exact) countries as being high income. Ultimately, the subjectivity of the variable(s), their weights and index thresholds used to classify countries suggests an almost infinite number of different classifications.

 

Emerging Markets are fluid…market participants not always so

Second, these emerging and developed groups are by definition fluid, not static, which has led some official institutions such as the UNCTD to refer to a third grouping which sits in between – the economies in transition. But even this is a blunt categorisation which fails to fully capture countries’ dynamics. For example, Russia’s economy has if anything been “de-emerging” while Argentina’s has failed to re-emerge in past decades after having been a regional powerhouse up to the 1930s, with its currencies, stock markets and assets depreciating rapidly.

This of course is not confined to the emerging markets grouping. Greece’s economic trajectory is taking it away from the developed universe, with GDP contracting 10% in recent years and unemployment and poverty rocketing. But its eurozone membership and access to financial assistance that very few countries enjoy confers it a special status.

In any case market participants, namely sell-side institutions, have on the whole been more conservative in how they split the world between developed and emerging economies. For example, a country such as Singapore is still often treated as part of the EM complex, despite the IMF and World Bank rightly qualifying Singapore as, respectively, advanced and high income and the UN’s HDI ranking Singapore 9th globally (its GDP per capita is higher than Spain’s and only marginally lower than Italy’s). You could make similar arguments for Hong Kong, which has a higher GDP per capita than New Zealand.

Finally it’s worth pointing out that some countries may be tacitly resisting the developed economy tag, even if its policy-makers strive to further growth and prosperity. For starters it can lead to greater regulatory scrutiny. Furthermore, being admitted to developed indices, such as the MSCI, can lead to a fall in inward investment as the country competes with bigger economies for fund managers’ attention and money (e.g. Israel which joined the developed MSCI in 2010).

Figure 1: Defining an emerging market Olivier desbarres

Figure 1: Defining an emerging market

 

The acronyms: BRICS, MIKT, MINT, CIVETS and the Next-11 (and IBRICS?)

In response to these challenges, market participants have divided this broad EM grouping into more manageable (and arguably marketable) sub-groups which I summarise in Figure 3.

The best known is the BRICs – Brazil, Russia, India and China – an acronym coined by Jim O’Neil in 2001 and augmented a decade later to include South Africa (BRICS). It has proved a remarkably enduring acronym but is showing signs of ageing due in part to the divergence in economic performance of its component countries.

While India is undergoing somewhat of an economic re-birth and China’s economy has grown to be second largest in the world after the US (and is still growing at an enviable 7% per annum), the economic fortunes of Brazil and Russia have been far less rosy. Russia has been hit hard by economic sanctions and the fall in crude oil prices while Brazil has been rocked by corporate scandals and held back by the reasonably closed nature of its economy. Their currencies have been amongst the worst performers in the past 3 years (see Figure 2), as have been their stock markets. But this may have in itself created potential opportunities: 50% of 500 global business leaders recently surveyed by a Washington consultancy still see Russia as a viable investment environment (see http://www.atkearney.co.uk/).

South Africa’s infrastructural short-comings, which result in regular power black-outs, have been a constraint on growth which last year slowed to a five-year low. India has a similar constraint but has a number of advantages, including a very large and young population and geographical proximity to the Middle East and Asia to name but two.

best currencies olivier desbarres

Figure 2: Some of the best performing EM currencies are not included in the usual “acronym” groupings

The Next-11 and MIKT countries, coined by Jim O’Neil in 2005 and 2011, respectively, broadened the market’s focus beyond the big four BRIC economies, with the next 11 including Indonesia, Turkey (which at the time was making good progress towards potential EU membership) and North Africa and Middle East economies (Egypt and Iran). Perhaps the BRICS, assuming this denomination has a shelf-life, should at the very least become IBRICS (Indonesia, Brazil, Russia, India, China and South Africa).

MINT (Mexico, Indonesia, Nigeria, and Turkey) is an acronym devised by Fidelity in 2011 with a slight variant, replacing South Korea with Nigeria. This made sense given Korea’s rapid economic and human development and global prominence of its companies (e.g. Samsung).

The CIVETS, which includes Indonesia, Vietnam, Egypt, Turkey and South Africa and was coined by the European Intelligence Unit in late 2009, introduced Columbia to the mix.

 

Missing from the mix: Philippines, Thailand and Romania to name a few

It is noteworthy that these groupings have perhaps become less ambitious. The nominal GDP of the BRIC countries rose sixfold between 2001 and 2014 (to over $15 trn) while the CIVETS’ combined GDP only rose 1.5 times between 2009 and 2014 (to $2.9trn).

Perhaps more importantly, a number of countries are either not included in any of these acronyms (e.g. Malaysia, Thailand and Taiwan) or only included in one sub-grouping (e.g. the Philippines which is in the Next-11 group). Yet Thailand and the Philippines’ economies and asset classes have performed well in recent years. The Philippine peso has been one of the best performing currencies of the past 3 years (see Figure 2) and the stock markets of both countries while small have outperformed the Global Index over the same period. The Philippines’ economy enjoys diversified sources of balance of payments inflows which provide somewhat of a buffer during periods of global economic turmoil. These FX inflows include:

  • Merchandise exports including electronics, transport equipment, petroleum and agriculture;
  • Tourism revenues (about $4bn);
  • Remittances from workers abroad which have been rising at 7% per annum since 2009 and hit a record high of $24bn in 2014 and;
  • Business processing outsourcing which hit a record high of about $18bn in 2014, thanks in part to the Philippines overtaking India as the call-centre capital of the world.

Furthermore, none of these acronyms include central and east European economies such as Hungary, Poland and Romania. Yet the IMF, World Bank and UN still classify Romania as developing for example. One reason may be that these countries’ membership of the European Union offer them somewhat of a distinct status.

Gavin Serkin, Emerging Markets Editor-at-Large at Bloomberg News, has attempted to remedy this by focussing on 10 frontier countries with the potential to lead economic growth in the coming decade. These include some of the the usual suspects but also Myanmar, Ghana, Kenya, Sri Lanka and Romania (see www.frontierfunds.org).

Figure 3: Multiplication of EM acronyms but some economies still missing from the mix

Figure 3: Multiplication of EM acronyms but some economies still missing from the mix

 

Olivier Desbarres currently works as an independent commentator on G10 and Emerging Markets. He is a former G10 and emerging markets economist, rates and currency strategist with over 15 years experience with two of the world’s largest investment banks.


[1] Composite statistic of life expectancy, education, and income indices

[2] Organisation of Economic Cooperation and Development, (2) term coined by Jim O Neil in 2001, (3) term coined in 2010, (4) term coined by Fidelity in 2011, (5) term coined by Jim O Neil in 2005, (6) term coined by Jim O Neil in 2011, (7) term coined by Robert Ward, Global Director of the Global Forecasting Team of the Economist Intelligence Unit (EIU), late 2009, (8) Gavin Serkin, Emerging Markets Editor-at-Large at Bloomberg News highlights 10 frontier countries with the potential to lead economic growth in the coming decade, (9) 19 individual countries + the EU.

Sources

Fig 1 – IMF, World Bank, United Nations, Morgan Stanley

Fig 2 – Bank of International Settlements

Fig 3 – World Bank, G20, G7, OECD, www.frontierfunds.org

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