Friday, 11 July 2014 17:58

Richard Lapper: Confident about Emerging Markets future

"The massive emerging markets sell-off of 2013 hasn't been accompanied by any sovereign debt default"

When the Financial Times launched LATAM Confidential in 2013, some people thought it was a brave thing to do since the whole of emerging markets universe has been recently written off in some quarters, as a result of the worries about monetary tightening in the USA, the introduction of the so-called tapering, leading to a big sell-off in emerging markets.

But at the "Confidential" research unit at the Financial Times we are pretty confident about the future of emerging markets. We think they will keep growing and developing.

It's odd that there has been such a sell-off because in reality emerging markets have been much more solid than they were in the 90's and early 2000's when I was travelling around Latin America and writing about events like the crash in Argentina for example.

We feel that three long-term secular shifts have been central to this process:

1. The rise of China and other Asian economies has increased the demand for natural resources and underpinned a steady rise in prices, which despite recent falls are still much higher than they were in the 90's.

2. The rise of emerging markets consumer over the past decade or so. We are talking about many millions of people who have been isolated in rural areas or stuck in urban shantytowns in Latin America, Asia and Africa, previously excluded from the formal consumer economy. This is a massive and irreversible change that led to urbanisation and industrialisation especially in Asia and has also altered the way big consumer companies, whether they make cars, cosmetics, toothpaste or railway carriages. It has altered the way these companies think about the world and has altered the character and shape of international flows.

3. These two changes above have been accompanied by the emergence of deeper and more sophisticated economies and financial markets in emerging markets over the last twenty years. You might say that the increase in tradable debt, from 112bn to 2.7 trillion, is not a good thing but the point is this increase has taken place at a time when emerging markets finances are much more solid in general terms. The rise in reserves for example has increased from 116bn in 1993 to 6.1 trillion in 2013, while other indicators like debt to GDP ratio have also improved.

It's worth mentioning that this massive sell-off has not been accompanied by a single sovereign debt default. So it is fair to say that in Europe and in the USA these realities are often not fully understood. The term BRICS has helped popularise emerging markets, but I think perhaps too often this contributes to misunderstanding because the world of emerging markets is just not reducible to just Brazil, Russia, India, China and South Africa. There are not quick ways of trying to package a thesis or analysis, because in reality the emerging markets world is much more sophisticated than that.
Journalism sometimes contributes to this misunderstanding because there is an intrinsic bias towards the negative, as it's a lot easier to sell a story predicting chaos than just a continuation of boring stability.

This article was written based on a keynote speech delivered by Richard Lapper in London on October 8th 2013 during innovaBRICS & Beyond 2013