The Growing Influence Of Emerging Markets

By M. Isi Eromosele

While the market performance of emerging market countries have been affected by the fiscal and economic crisis buffeting the United States and Europe, we at Oseme Consulting believe that emerging markets will surface strongly from this downturn and continue to lead the recovery in the global economy. This assertion is due to their sound macroeconomic fundamentals and growth. After the global economy fully recovers, we expect the correlations between the emerging and developed markets to finally drop.

Better Positioning For Strong Recovery

Many emerging markets have made strong gains in diversifying their economic exposure so as not entirely depend on the United States as the only market for their exports. As such, while exports to the United States from these emerging countries have dropped since 2008, their exports to other emerging countries have increased. As a case in point, half of China’s exports now go to emerging economies and South Korea’s total exports to emerging countries have risen, even as its exports to the United States have dropped by as much as 20 percent during the past 24 months.

Many emerging markets, especially in Asia, have used the boom of previous years to improve their fiscal position, building up record reserves and fiscal surpluses. The improved positions of these countries have given them the flexibility to respond aggressively to the economic slowdown and many countries have initiated significant, sophisticated measures. China, for example, is in the process of implementing a package, representing 10 percent of its GDP, consisting of extensive tax breaks, government subsidies and increased spending on infrastructure. Most emerging marketing countries, including China, India and Korea, have cut interest rates in an effort to stimulate their economies.

However, not all emerging countries have made improvements. Turkey, for example, is running a sizable current account deficit and has large foreign debt.

A Diversified Emerging Market Strategy

In recent years, the correlations between emerging and developed markets have slowly increased as a result of economic integration and a trend toward institutional investors reducing their home country bias as they seek diversified international investment portfolios. The global financial crisis magnifies the pressure and correlations between the two markets have risen significantly in the short term. Despite all these trends, emerging market correlations remain lower than those between developed nations. Investors interested in broadening their exposure may further diversify their portfolios with allocations to emerging small cap and frontier markets.

While emerging market companies such as Samsung are highly integrated with global equity markets and global business cycles, smaller emerging market companies are affected more by local and regional factors and can offer valuable diversification benefits. Also, small companies have historically led the way out of recessions, so they were the first to rebound.

Emerging Markets Potential

At Oseme Consulting, we continue to advocate additional allocation to emerging markets, due to their long-term diversification benefits, high growth potential and improving macro-economic fundamentals. Emerging markets have matured significantly in recent years and are no longer the source of economic contagion. In fact, many emerging markets, with their positive trade balances and substantial reserves are better positioned to weather the financial crisis than some developed markets, even as they continue to lead the global economic recovery.

M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance

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