Emerging markets will lead recovery

China, India and Indonesia are the closest to bridging output gaps

The stock markets made a strong come back last year from its low levels. However, as the markets enter the year 2010, the moot question is whether the current rally will be sustained? Though many argue that India’s growth is a standalone story, the markets would not be able to shy away from the tardiness in global economic recovery and any economic bubble elsewhere.

“Global recovery will be sluggish through 2010, with lurking risks of a double dip,” says Jay Shanker, Economist-Vice President, Religare Capital Markets in a report ‘Advantage India 2010’. However, he says emerging markets will continue to lead the recovery as their growth will be differentiated and spotty.

India, along with countries such as China and Indonesia, has demonstrated its resilience to global financial crisis this time around and is better placed to garner a lion’s share of the global capital flows. According to him, “India will become a standalone asset-class rather than being a part of emerging market portfolios of foreign investors.”

Cautious revival

For 2010, Standard & Poor’s, a leading global rating agency, expects incremental improvement in macroeconomic fundamentals, ongoing repair in the financial sector, and a cautious revival in the non-financial sector. “Nevertheless, we expect some potholes on the road to the ‘new normal,’” cautioned Diane Vazza, head of Standard & Poor’s Global Fixed Income Research Group. “For example, we think there will be bursts of volatility, particularly in the second-half of the year, as some of the emergency government support provisions approach their expiration date. In fact, we would not be surprised to see a partial retreat from 2009’s strong rally in risky asset values.”

Given that much of the improvement stemmed from unconventional government policy measures, the private sector’s effectiveness in taking over the reins from the government as the primary engine of growth for the world economy remains a critical determinant of 2010’s outlook.

In fact, the outlook for 2010 is far from rosy, and additional risks might emerge from other key external variables, including geopolitical events and oil prices. “One of our expectations for 2010 is that the swing from negative to positive real GDP (gross domestic product) growth will likely occur simultaneously across regions, though the pace of recovery will vary greatly by country,” Ms. Vazza noted. “Bolstered by fiscal stimulus and monetary accommodation, economies worldwide are broadly set to enter a period of positive quarterly gains in GDP beginning in the third quarter of 2009.”


In the case of Asia-Pacific ‘rated’ economies, all are expected to post positive GDP growth in 2010. But concerns and challenges remain — inflation is an issue for some while the questions of when and how to exit from expansionary monetary and fiscal policies are critical for all.

“Although all economies are now performing better than expected, the extent of recovery varies across the region,” says Dharmakirti Joshi, Director and Principal Economist of Crisil, a Standard & Poor’s company. “Policy focus is gradually shifting from managing the crisis to managing the ongoing recovery. Most countries are likely to begin by exiting monetary easing, then gradually withdraw fiscal stimulus.”

“We need to look at how quickly economies are bridging output gaps and whether or not inflationary pressures are emerging. If we simply equate pre-crisis GDP growth rates with potential growth, then China, India, Indonesia, Australia, and Vietnam are the closest to achieving their potential. Of these, the central banks of Australia and Vietnam have already raised interest rates,” says Mr. Joshi.

“Just as Asia-Pacific is leading the world in economic recovery, so too will it lead the exit strategy. In our opinion, the coming year will see all Asia-Pacific economies adopt a tightening stance in one form or the other,” he adds.

Investors were expecting an effective and smooth continuation of the policies — with proactive monetary and fiscal policies — of a stable government which would bring the economy back on track.Will the rally be sustained?

Presenting a contrarian view, Ashvin Parekh, Partner, Global Financial Services, Ernst & Young, argues that the rally in global markets, including India, was driven by liquidity. “It is the liquidity available not only in the domestic market but also in the world markets” as stimulus packages of the governments stalled the markets from a deep slump. In fact, the amount of liquidity pumped in by various governments were coming in to India. Said Mr. Parekh, “It’s like a trickle but not sustainable.”


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