The Risk to Emerging Markets Stocks

Excerpt from Morgan Stanley economist Stephen Roach's June 16th essay:

...it is possible that emerging market securities have benefited largely from the combination of excess global liquidity and an increasingly urgent search for yield by fund managers. If that’s the case, and the liquidity cycle now turns, a sustained correction could well be in the offing...

...there’s every reason to think that the next crisis in emerging-market economies will arise out of circumstances that will be very different than those that nearly brought the world to its knees in 1997-98.

At the top of my list is a possible capitulation of the American consumer -- long the most powerful engine on the demand side of the global economy. Such an outcome would strike at the heart of what I judge to be a still-chronic weakness in the developing world -- excess reliance on US-centric external demand. In large part, emerging-market economies have not succeeded in boosting internal consumption and, as a result, they remain heavily dependent on exports as the sustenance of growth. By our reckoning, exports were 38% of developing world GDP in 2005, well in excess of the 26% share in the developed world as a whole...

...We debate the US consumption outlook endlessly. With consumers refusing to flinch over the last few years, the bear case admittedly suffers from a major credibility problem. But now the stars are in especially tough alignment: A persistence of weak labor income generation, a faltering of the property-induced wealth effect, a sharp run-up in energy prices, negative personal saving rates, and mounting debt service burdens all point to a consolidation of discretionary consumption in late 2006 or early 2007.

Comments

[saud ibn ab...:]

Suggestion at google type in imf.org data on Mainland China authoritative and papers on this topic insightful. USA economy instead has continued growth serious problems when compared with China. USA should not attempt to "use" China's population to monetize USA's excessive personal and government debt. Per capita must not include China's population. Nor may USA pension "under funding" be supplimented by China's economy. Those are to non-china originated economic crisis.

2006 Jun 19 06:33 PM

[Enzio von ...:]

I agree with Stephen's point concerning the dominance of the US consumer when observing emerging markets.
Where I differ is that each of these markets has their own Economic Time - some of it good for markets, some not so good. And with a rising middle class in these markets, global liquidity still plays a role - but the importance of domestic liquidity is rising, too.

2006 Jun 20 07:48 AM

[saud ibn ab...:]

USA economy frm its consumers willingness to amasss too high personal debt is not to Eastern Hemisphere economies. Absent USA demand in excess of 1.2 billions Chinese, 1 billion Indians, and appox 1 billion non europeans will be ample demand for emerging economies. USA only consums the "nth" unit of goods. with USA personal bankruptcies about to explode, really demand will not be that vital. Instead high eastern hemisphere liquidity will "save" at 10 to 50 cents on the dollar USA firms. Really, how emerging stocks firms will have rapid mergers and acquisitions growth. To all benefit.

2006 Jun 20 07:15 PM

[Enzio von ...:]

I agree with the emergence of the emerging consumer. That logic also applies to commodities: these economies will need more and more of them, and that end-demand will remain impervious to what the Fed Board deliberates

2006 Jun 20 11:18 PM

[saud ibn ab...:]

Understand Fed Board is merely one central bank. View make-up of IMF and then read in depth IMF's economists' papers on emerging economies. If zero demand from Western Hemisphere economies, ample demand production investments R&D from Eastern Hemisphere's emerging: producers, workers, savers, consumers, "voting interests groups" and concentrated wealthy families. Western Hemisphere business, even multinationals, need to recognize, not linking these two hemisphere's regional economies assures global growth with global diversification. Read www.japansociety.org and attend seminar on this topic in New York City.

2006 Jun 21 05:23 PM