A Yearly Outlook For Emerging Countries

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Includes: SPEM
by: Oguz Erkol

In contrast to the developed countries, the emerging world has plenty of advantages, at least from the point of view of economic growth. Emerging nations have many years of economic catch-up ahead of them.

Even in the aftermath of the 2008's global financial crisis, BRIC growth rates of 4% to 10% far outpace those of the G7. In addition, interest rates in Europe and the United States are around zero, just like it had been in Japan for nearly last two decades, as emerging nations still have plenty of ammunition including rate cuts, which supports the economic growth.

Let me share my opinions on emerging countries one by one.

China

China, the fastest-growing economy, was targeting a "soft-landing" for 2012. As both inflation and growth are cooling more quickly than expected, we can say that China is reaching its target and even China may promote a further easing to support its consumption, which is the main lacking of its economy as the Consumer Price Index has already reached a 20-month-low at 3.2% year over year.

Other data indicating that the second-largest economy could prevent a hard landing is the February's PMI. According to these data, the Chinese industrial sector grew more than expected in February due to increased export orders for the first time in four months. The official figure of Chinese PMI rose 51.0, beating the expectation of 50.7, and higher than January figure of 50.5. I should also note that a PMI above 50 indicates expansion. The Chinese economy is likely to remain strong while it makes a production / consumption balance that keeps itself more healthy.

India

Surprisingly, India's economy slowed further in Q4 2011, with GDP growing at 6.1% yoy, (vs. 6.9% yoy in Q3). Declining government consumption is the part of the reason.

Inflation is the most important issue of the economy, but it has started to decline finally, even if it is driven by food price base effects. It was officially announced by Pranab Mukherjee, the Finance minister, the inflation expectation would be in the 6%-7% range.

On the other hand, the Indian economy still has downside risks owing to global weakness constraining growth through its impact on trade and finance flows.

Brazil

Frankly speaking, 2011 was the year when the Brazilian economy landed hard after experiencing a strong decline in Q3. The economy grew by 2.7%, which is an unsatisfying rate. But now it appears that the slowdown of 2011 is behind us.

First of all, on March 8, the interest rates were cut to 9.75% by the central bank for the fifth time running as government seeks to revive economy that stalled in the second half of last year. Well, actually, the slowdown is being used by the government as an opportunity to continue to reduce Brazil's interest rates, which are the highest for any large economy and already higher than they should be.

Due to this easing monetary policy, the key risk factor for economy will be inflation, especially during the second half of the year, but, nevertheless, Brazil is the country among BRICs, which I am the most bullish about on growth.

Russia

Vladimir Putin is elected as Russia President for six-year term but still a key question remains unanswered: if this will risk economic and political crisis at some point or not? Geopolitical tension is another risk factor for Russia.

As you know, Russia is an oil-exporting country and as result of this it is among the beneficiaries of the upside trend line in oil prices. Assuming that oil prices stay high through this year, the Russian economy will be strong but key incremental negative is administratively regulated tariffs, which is expected to push up headline inflation as of the beginning of the second half of the year.

South Africa

After the 2009 harsh recession period, the economy has been trying to recover fully, however it still shows tentative signs of improvement even if the PMI data for February is stronger than expected, because we need to see some actual hard economic data to confirm that the economy is making progress.

The recovery in South African Rand (ZAR) inflation seems to be a crucial issue for the economy in 2012, especially while the central bank is not likely to raise the interest rates before 2014's elections. I expect a much lower growth rate this year compared with last year's 4.5%.

Mexico

First of all, a recovery in the U.S. is great news for Mexico. Mexican exports to the U.S. will contribute to its economic growth and in my opinion export growth will be really high this year.

The exchange rates are considerable key figures of the economy due to the impact on both exports and inflation.

Turkey

Turkey is a country that always benefits from the global liquidity conditions and after the ECB's LTROs it makes me think that in 2012 Turkish economy will continue to grow but not much more than last year. Turkey had been the second-fastest growing country of the world until Q3 2011.

The biggest problem for the Turkish economy is its legendary current account deficit, which has recently been a big threat as oil prices increase. The Turkish government released a Medium-Term Programme last year targeting growth at 4.0% in 2012 and it looks like officials are willing to remain loyal to it even though we see a growth-inflation trade off in Turkey. Shortly, Turkey will continue to grow.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.