Emerging markets – the winners and losers of 2017

It’s been boom time for emerging markets in 2017, with strong gains in many developing countries around the world.

Global growth reached 3.6% over the year, with broad-based gains in Europe, Japan and the US.

But it was emerging markets that led the way, with China, emerging Asia, emerging Europe and Russia all performing well, according to figures from the International Monetary Fund (IMF).

Overall GDP (gross domestic product) growth in the developed world came in at 2.2%, with the US notching up 2.2%, up from 1.5% in 2016.

The euro area emerged from the doldrums with a strong showing at 2.1%, up from 1.8% the year before; Canada achieved 3.0% growth, up from 1.5%; and Japan at 1.5%, up from 1.0%.

Asian tigers lead the way

Asian tigers that continue to lead the global economy Photo: Shutterstock

There were some slight fallers, with the UK at 1.5%, down from 1.7% in 2016; and Australia at 2.2%, down from 2.5% – but still in strong positive territory.

However, it’s the Asia tigers that continue to lead the global economy with strong GDP growth projected at 5.6% this year and 5.5% in 2018.

Research by Bloomberg is bullish on continued economic growth in Russia, China, South Korea, Thailand, Malaysia, and Nigeria, and neutral on the Philippines, India and Peru.

Look at the political situation, however, and it’s a slightly different story.

There are warning flags on South Korea, the Philippines, Thailand, Malaysia, Brazil and Chile because of issues ranging from potential nuclear war on the Korean peninsular to political instability, while Nigeria has serious monetary issues to address.

So let’s look at the emerging markets winners and losers in 2017 – and whether that situation is likely to change over the course of next year.

WINNERS

Russia

Russia is seeing the first shoots of growth after nearly two years of recession caused by low oil prices and economic sanctions after its invasion of the Crimea.

Russia is seeing the first shoots of growth after nearly two years of recession Photo: Shutterstock

A slight recovery in oil prices, following its agreement with OPEC nations to control output, together with higher commodity prices, have helped to steady the ship. The Russian economy has shown signs of being able to ease itself off its dependence on oil and gas, while inflation has slowed and wage growth resumed.

Russia’s GDP grew by 2.5% year on year in the second quarter of 2017 and by 1.8% in Q3 – the fourth successive quarter of growth, and a marked turnaround from a figure of -4.5% in Q2 2015.

Russia also enjoys a more positive relationship with the current incumbent of the White House, meaning more sanctions are unlikely, at least by the US, unless it takes further aggressive action in its former eastern European satellites such as the Ukraine.

India

Many experts view India as the next China in terms of its potential for dramatic economic growth.

GDP growth was down slightly at 6.6% from 7.1% in 2016, but IMF projections show a recovery to 8.2% by 2022.

Market reforms introduced by popular prime-minister Narendra Modi, who took office in 2014, are modernising the country’s ponderous bureaucracy and centralising power in the national government.

The Goods and Services Tax (GST), which came into effect on 1 July 2017, is the biggest reform of the tax system since independence from the UK. GST aims to replace a plethora of around 17 different state and national taxes, and make it easier for companies to trade within India.

Other business-friendly reforms have been introduced such as making it easier for firms to hire and fire staff, while corporate taxes have also been cut.

China

China is expected to maintain last year’s GDP growth of 6.7% in 2017 Photo: Shutterstock

China may be the world’s second biggest economy, but it has been growing at such as speed that in many ways it has more of an impact on global economic growth than the US – the world’s largest economy.

China is expected to maintain last year’s GDP growth of 6.7% in 2017, falling slightly to 6.5% in 2018 and dropping back to 5.8% by 2022.

The IMF says the country has potential to sustain strong growth over the next three to five years, but this will require speeding up reforms to make growth less reliant on debt and investment.

China’s debt-to-GDP ratio stood at 259% in 2016 and is projected to rise to an astonishing 327% by 2022. The country currently has roughly $3 of debt for every dollar it produces.

Korea

Were it not for the shadow of conflict with the communist regime to the north hanging over it, Korea would undoubtedly be a firm favourite for many investors.

The prospect of a conflict on the Korean peninsular must give pause for thought Photo: Shutterstock

It has a strong and growing middle class, and industrial giants such as Samsung, Hyundai and LG continue to churn out consumer goods for consumption at home and abroad.

Heavy industry is healthy, too, with a strong shipbuilding industry.

GDP growth has been steady at around 3.0% per annum since 2013, while inflation is currently just 1.3%.

Sustained rapid growth has boosted GDP per capita to within a quarter of the average of the most advanced countries, according to the Organisation for Economic Co-operation and Development (OECD).

But the prospect of a conflict on the Korean peninsular must give pause for thought. Even a conventional conflict would destroy much of Korea’s infrastructure in just a few hours.

The Philippines

The Philippines has also been seeing rapid economic growth, with a 6.9% year-on-year GDP increase in the first half of 2016 on the back of strong domestic demand.

This makes it the strongest performing economy out of the major east Asian developing nations, including China, Indonesia, Thailand, Malaysia and Vietnam.

“The Philippines is currently one of the most dynamic economies in the East Asia region, with sound economic fundamentals and a globally recognised competitive workforce,” the World Bank said in a recent update.

Recently-elected President Rodrigo Duterte’s has launched 10-point economic plan, nicknamed ‘Dutertenomics’, including a $180bn infrastructure programme called ‘Build Build Build’.

The government also has an ambitious reform programme to make it easier for companies to do business.

However, Duterte’s war on drugs, which has given carte blanche to extra-judicial killing of alleged drug bosses, has alarmed human rights campaigners.

Malaysia

Malaysia saw GDP growth of 5.4% in 2017, up from 4.2% in 2016, with inflation slightly higher at 3.8%.

It still has one of the fastest-growing economies among its peers, with domestic demand from a rapidly growing middle class the main driver of growth.

Despite the impact of falling commodity prices, the economy has remained resilient, thanks to a diversified economy, sound economic policies and strong financial markets.

Vietnam

Vietnam is now one of the most dynamic emerging countries in Asia Photo: Shutterstcock

Vietnam’s shift from a communist state to a market economy has transformed the country from one of the poorest in the world into a lower middle-income country, according to the World Bank.

The country is now one of the most dynamic emerging countries in Asia. GDP growth was a healthy 6.3% in 2017 (6.2% in 2016) and is expected to remain at around that level through to 2022, with inflation steady at 4.4%.

“Vietnam’s economy is strong as a result of the strong momentum of Vietnam’s fundamental growth drivers – domestic demand and export-oriented manufacturing,” says Sebastian Eckardt, lead economist for the World Bank in Vietnam.

Sri Lanka

Sri Lanka was crippled by sectarian strife for 25 years, but has seen rapid growth since the end of the civil war in 2009.

The economy grew at an average of 6.4 percent from 2010-2015 – hitting a peak of 9.1% in 2012 – reflecting a peace dividend and a move towards reconstruction and growth.

With a total population of 21 million people the nation is being transformed from a mainly rural to an urban, service-driven economy, but continued growth will depend on the pace of structural change and improved productivity.

Growth fell to 3.4% in 2016 due in part to bad weather, but rose to 4.7% in 2017 and is predicted to continue at around that level until at least 2021.

LOSERS

Brazil

Brazil has been dogged by corruption at the highest level Photo: Shutterstock

Brazil, once the darling of emerging market investors, is showing signs of recovery after a raft of corruption scandals at both corporate and political level.

All the statistics point towards a strong consumer-led recovery – retail sales rose 9.3% in September, while imports of manufactured goods increased by 44% in the third quarter of 2017. Consumer debt is low in Brazil, too, running at 42% of annual income compared with 100% in the US.

However, the presidential election in 2018 is something of an unknown quantity in a country mired in corruption at the highest level.

One of the country’s biggest companies, Petrobras, has been involved in a scandal over claims that up to $10bn was siphoned off to pay for political campaigning by former President Dilma Rousseff – impeached in August 2016 for breaking budgetary laws.

If the current, interim president Michel Temer – seen as market-friendly – can hold on in the upcoming elections, that might signal an upturn. But he is also facing bribery allegations – and possibly even impeachment – and his approval ratings are poor.

Chile

Chile has just emerged from a presidential election that could spell good news for the country’s economic prospects.

Western corporations were relieved at the win by business-friendly former Harvard economist, billionaire Sebastián Piñera, who was up against strong left-wing opposition.

A strong showing in opinion polls by radical left-wing candidate Frente Amplio sent shockwaves through the economy, with stocks falling 10% in just a few weeks.

Piñera, who was also president from 2010-14, could well help Chile break free from the four years of stagnation under a centre-left coalition.

GDP growth in Chile has fallen from 6.1% in 2011 to 1.4% in 2017. However, inflation has dropped from 3.3% to 2.3% over the same period.

According to the OECD, GDP growth is projected to strengthen to around 3% in 2018-19, supported by improving external demand, a more accommodative monetary policy and investment in mining.

Argentina

Argentina’s GDP growth has been up and down like a fairground ride since the global financial crisis.

Argentina’s government faces major issues, including an inflation rate of 27% Photo: Shutterstock

It’s currently in positive territory at 2.5%, but given its recent performance it could be -2.5% next year. Inflation has also soared to a dangerously high level of 26.9% from 10.1% in 2010.

Argentina’s government faces major issues, with historically low rates of investment and large fiscal deficits financed by creating new money, which has led to the high level of inflation.

New centrist president Mauricio Macri has liberalised the country’s economy and opened it up to global trade and foreign investment, but there is still a long road ahead.

Mexico

The election of US president Donald Trump spelled bad news for Mexico.

With Ford cancelling plans to build a $1.6bn car plant in the country and other big US firms wanting to be seen to be patriotic, the future – at least in terms of US investment – does not look good.

According to the latest IMF figures, the Mexican economy has decelerated, with annual GDP growth flatlining at around 2%. Oil production is slowing amid a global glut of crude, manufacturing is contracting and inflation has risen to 5.9%.

A further economic slowdown is expected due to uncertainty over the potential renegotiation of the North American Free Trade Agreement (NAFTA).

“A lot of the rhetoric of late has been determined by the potential effects of American policy and that’s still a big question mark,” says Laith Khalaf, senior analyst at Hargreaves Lansdown. “I would expect [the Trump effect] to dominate for some time to come.”

Nigeria

GDP growth in Nigeria is on course to recover slightly to 0.8% in 2017 after a dramatic fall from 11.3% in 2010, but inflation has rocketed from 8% in 2014 to 16.3% this year.

There has been some recovery in oil revenues and a continuing strong performance in agriculture, but serious issues remain to be addressed.

Investment opportunities

Expect volatility if you're investing in emerging markets Photo: Shutterstock

Emerging markets can make for a profitable investment – but if you do, be prepared for volatility, says Khalaf.

“If you are a long-term investor then absolutely invest in emerging markets, as long as you have the capacity to watch your capital fall – because that will happen at some stage,” he says.

“Whether it’s next month or three years from now, you can make a fair prediction there are going to be some pretty nasty falls in the market over the next 10 to 20 years – and there will be some pretty nice rises, as well.

“It’s an area where there is a developing infrastructure and in a lot of places a growing middle class as well who are looking to consume all the kinds of goods we are used to in the developed world, and that helps to drive company profits.

“It’s a more volatile area, but it’s an area where if you are a long-term investor it’s difficult to ignore.”