Forget the term 'emerging markets' - they're in the driving seat now

The "advanced" industrialised economies are in dire straits. Britain, printing money and issuing sovereign debt like there's no tomorrow, could see its economy shrink by 6pc in 2009. The US, meanwhile, will this year register a budget deficit equal to an eye-watering 14pc of GDP, a level unmatched since the Second World War.

By Liam Halligan
Published: 9:26PM BST 08 Aug 2009
Comments 26

The moribund Japanese economy, after its authorities made an art form of the head-in-the-sand zombie-bank policies the UK and US are now pursuing, has just endured an annualised 13pc GDP contraction. Even the mighty Germans aren't immune, with exports suffering their steepest decline on record.

Meanwhile, many of the emerging markets (EMs) are doing quite nicely, thank you. While the Western world screams, most of the populous, industrializing nations of the East are still expanding at a fair old clip.

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China chalked up a head-spinning growth rate of 7.9pc between March and June, up from 6.1pc in the first quarter. The latest projections from the International Monetary Fund suggest the EMs as a whole will grow by around 2pc this year and 5pc in 2010. The developed economies, meanwhile, will shrink by 4pc in 2009 and could still be contracting next year.

In recent months, many Western economists have argued the EMs will be sucked into this global recession – and can only keep growing if the West does too. That was always parochial, self-serving tosh.

The reality is the emerging giants have massive domestic markets and do a growing share of their business with each other and not the West. As of last year, for instance, Brazil's biggest trading partner is now China, rather than the US. The recent expansion of intra-Asian trade is another of the big unsung stories of this credit crunch.

Investors are starting to notice. Every one of the world's top 10 performing stock indices so far this year is based in an emerging market economy. Last week, the MSCI index of all EMs climbed above the level it was at when Lehman Brothers went belly-up back in mid-September – the moment the sub-prime screw really tightened and global markets collapsed.

In London and New York, meanwhile, the FTSE100 and S&P500 are both still 20pc shy of their pre-Lehman levels – even though the UK and US governments have unleashed the most wildly expansionary stimulus packages in peace-time history.

The Chinese stock market is up 88pc in the year to date, Brazilian shares too. Indian stocks have gained almost 70pc during 2009. Some say EM asset values have risen too fast – and are now liable to topple. These are immature markets and canny investors always look to take profits, so there's something in that view.

Certainly, the main Brazilian stock index now has a price-earnings multiple in the mid-20s, while the same Chinese valuation yardstick is in the mid-30s – both pretty high –suggesting these markets may be over-bought.

Yet the FTSE-100 has a price-earnings valuation above 50. That's ridiculously high. Pumped up by printed money, blind faith and hype, UK stocks are grossly over-valued compared to the performance of the underlying companies.

The big picture is that these nations are in a far better financial state than the Western economies they used to admire. Bank bailouts and recession-fighting measures mean the average sovereign debt burden of the G7 nations will explode to 114pc by 2014, according to new IMF estimates. That's more than triple the projected 35pc sovereign debt ratio in the main EMs.

The Western world has run-up huge debts on money we borrowed from the East to fuel the shop-til-you-drop consumption binge of the last 10 to 15 years. How future historians will mock us. This debt blow-out a has hastened a power shift that has sapped the West's ability to impose its will on the rest of the world.

Still not convinced? Well consider that last week the price of many EM credit defaults swaps – broadly speaking, the cost of insuring against a sovereign debt going bad – went below those of the industrialised nations for the first time.

Now that our leaders have racked up monstrous debts in the name of our children and grandchildren, the markets have concluded that the Turkish government is more creditworthy than New York City, that Russia is a better bet than California.

These are not value-judgments. I'm reporting the collective views of the world's leading credit experts, people who spend their professional lives examining government accounts world-wide and then put real money at stake.

Their verdict – that Ireland is now twice as likely to default as China. Who says the "sub-prime" crisis is almost over? The truth is that its impact will never end.

http://www.telegraph.co.uk/finance/comm ... t-now.html