It is obvious that poorer countries can develop faster. Emerging markets often record over 5% GDP growth annually, while developed economies see 1.5% as a great success. Do their dynamics mean that they will suffer much more serious damage in the event of an economic crisis? How is their condition affected by the coronavirus epidemic? The above issues will be discussed in this article.
Emerging Markets – Definition
Emerging markets, from the English emerging markets , is a term referring to some regions of the world due to their economic development and the activity of financial markets. This term covers all countries on the path from frontier markets to developed markets .
These countries very often become an attractive place to invest capital, especially on stock exchanges, which most often provide higher rates of return than in highly developed countries. This group includes countries such as: Brazil, Russia, India, China, South Africa (the so-called BRICS economies) and Poland.
Emerging markets have a huge share of the world economy, surpassing even developed countries. However, it should be noted that GDP per capita in these countries is not particularly impressive. Simply, their dynamic development usually goes hand in hand with a rapid demographic growth. Now let’s move on to each of them.
Emerging Markets – China
As is well known, China is the world’s second largest economic power. Their economic growth and GDP continue to be greater than or equal to 6% per annum. They are also the largest export country in the world. Of course, this has its pros and cons.
In such a situation, the level of production strongly depends on the world economy. If the pace of its growth slows down, it affects Chinese foreign sales. The reason for optimism is, in turn, the systematic increase in consumption in recent years in this country and the still developing market of services.
Taking into account the demographic issue (population 1.4 billion), we are dealing with the emerging market with by far the greatest investment potential.
How is the Chinese economy dealing with the coronavirus epidemic?
It is difficult to compare the case of this country with the rest of the world, because that is where it broke out and began to spread. Industrial production in the period January – February recorded a decrease for the first time in the 21st century. The same is true for retail sales and investment in fixed assets, and the unemployment rate is at its highest ever.
These data will surely translate into this year’s GDP. Current forecasts even suggest a decline in the first quarter of 2020, which would be the first such case in 44 years and a strong harbinger of a recession. On the positive note, workers have already returned to work this month and factories have resumed operation to a greater extent, but it will be a while before all sectors return to full operation.
An additional problem is also the reduced demand for Chinese goods caused by quarantine in other regions of the world, such as the USA, Europe and Japan. In turn, to improve the situation for companies, since early March, they have been given the opportunity to postpone their debt and interest payments, and some provinces have increased their capital expenditure to stimulate the economy. It therefore seems that China has managed the epidemic well after all, and many countries should learn from its actions.
This is another country on the emerging markets list. Brazil has not been spared the current decade. The country faced the longest recession in its history and recorded a negative GDP growth. Structural problems and widespread corruption are also contributing to the slowdown in development. Worse still, the unemployment rate is still very high with public debt close to 80% of GDP.
However, 10 years ago, the country was one of the fastest growing consumer markets and was considered the runner-up of emerging markets. At present, there is still some reason for optimism. The Bovespa stock index has seen very strong gains over the last 4 years, which means that even during the recession, companies have been able to develop.
Therefore, it can be concluded that, unlike other Latin American countries, this time Brazil’s difficult situation was not accompanied by hyperinflation and outflow of foreign capital, their financial market still enjoys great interest among investors and often they pin their hopes on it. It should also be mentioned that the country described is the largest coffee producer in the world, moreover, this product is mostly intended for export.
What about the coronavirus epidemic?
At the moment, there is a strong conflict between the local authorities and the president of the country. In some regions, there is quarantine, so factories are not functioning and people are staying indoors, which enraged President Jair Bolsonaro. He demands that these measures be relaxed in order to minimize the economic consequences of the current situation. So it is too early to say how the current events will affect Brazil in the long term, the pandemic in South America is only in its infancy.
Emerging Markets – Russia
The economic situation in Russia has also been quite volatile in recent years. After two consecutive years of negative GDP (2015 and 2016), the country started to grow again and the unemployment rate was falling in values. It was widely believed that this market was undervalued, making the price / earnings ratio exceptionally high, attracting the interest of international investors.
All the factors therefore signaled strong economic growth in this emerging market. Unfortunately, the situation has changed again in recent weeks. The collapse of crude oil and natural gas prices had severe consequences for the country, starting with the weakening of the ruble and ending with the deterioration of the financial markets.
But what about the coronavirus epidemic?
Today, President Vladimir Putin announced the postponement of the constitutional referendum and announced a week off from work across the country. He also announced the launch of a series of programs to support both citizens and businesses. Additionally, he announced actions that will hit the income of the richest, which is quite unexpected.
In Russia, there is a two-week quarantine for those coming from abroad, schools and all social and cultural places were closed and mass events were banned. Definitely, at this point the pandemic is too early to assess its final effect on the economy of this power, but taking into account the situation on the oil and natural gas market, the forecasts do not seem too optimistic.
In recent years, India has been considered the most promising emerging market. Moreover, they are doing the best of all the G20 countries. They have maintained annual GDP growth above 4.5% throughout the decade, and the authorities are still actively trying to fuel the economy.
All this makes the financial market of this country very popular among international investors, securities record a continuous increase in demand there, so experts are optimistic about the future. The only drawback is rising inflation.
What, in turn, is the coronavirus epidemic?
India was definitely not prepared for it and is now panicking trying to drastically prevent its spread. Last week, schools, businesses, air and rail connections were closed, and the day before yesterday, all citizens were strictly prohibited from leaving their home for three weeks.
After the prime minister’s speech, people obviously ran to the stores to buy the necessary products, which caused a lot of social unrest and the police had to intervene in many places. It is difficult to even imagine the scale of such a lockdown, we are talking about a country with 1.3 billion people and unfortunately it has a very poor health care system.
The effects of the pandemic may therefore be unimaginable, but at present these are only forecasts, everything will turn out in the coming weeks.
Now let’s move on to the last BRICS emerging market, South Africa.
South Africa is by far the strongest economy on its continent. Credit for the development of this country is credited to Nelson Mandela, who during his short five-year term in office introduced a host of groundbreaking reforms that are still in force. In 2011, they were even admitted to the group of the most powerful emerging markets, BRIC, which changed its name to BRICS.
In this decade, her situation has changed rapidly. Virtually throughout this period, the country is on the verge of recession, recording negative GDP from time to time. Worse still, South Africa also has a record unemployment rate of 29.1%. It is also characterized by extreme income inequalities, reaching a size unattainable even in Latin America.
Corruption is another very important problem in this country.
But what are the positive aspects of its economy? Certainly rich deposits of natural resources. South Africa is one of the main miners and producers of gold, platinum and diamonds in the world. The sale of these raw materials certainly drives the country’s financial market. However, this does not change the fact that it is currently the least promising emerging market and foreign investors are rather withdrawing from it.
What about the coronavirus epidemic?
South Africa, as well as India introduced a nationwide three-week quarantine, begins today. It should therefore be expected that its negative impact on the economy in this country will be very severe and it cannot be expected to rebuild its position as a leading emerging market in the coming years.
Now let’s move on to another major emerging market issue, the MSCI Emerging Markets Index .
MSCI Emerging Markets
It is an index of shares of the largest emerging market companies established by Morgan Stanley Capital International. It consists of over 1,100 companies from 26 countries recognized as emerging markets. No stock represents more than 3.5% of assets, with the strongest representation from the financial and IT sectors.
The largest share is held by companies from China – over 30%, South Korea and Taiwan – over 10%. Most national indices of emerging market stock exchanges depend on it. Every quarter, adjustments are made to the composition of MSCI EM.
Emerging markets and their importance
Emerging markets are still certainly crucial to the global economy, and investing in them can generate a very high rate of return, so it’s worth taking an interest in them.
However, not all of them deserve the term „emerging” today, as some are in recession and continue to deteriorate. However, in the face of the crisis caused by the coronavirus epidemic, the current balance of power may completely reverse and the new countries that do the best in this difficult situation are likely to become the powers and go to the top of the most important emerging markets.
It is therefore worthwhile to closely observe how the governments of the given countries try to combat the current problem and analyze what their decisions will have economic consequences in the future.