Over the past few months, investors have been inundated with analysts posturing about the affects of the European debt crisis. The basic questions that continue to worry investors include: To what extent will the crisis spread? –and– Will it cause a global slowdown? Analysts have voiced their opinions ad nauseam ranging from doom and gloom scenarios to a full global recovery in the short term. Thus, there doesn’t seem to be consensus on what to expect.
However, since the EU/IMF bailout package makes it highly unlikely that the doomsday theories will unfold; brave investors are once again looking to get their feet wet in global markets. The emerging markets have been a lucrative investment in the past, yet the current European crisis brings some uncertainties that are worth considering before jumping back in. Particularly the question of how the booming Asian economies will be affected and if the emerging markets remain a good play going forward?
While it’s tough to know the answers at this stage of the game, we’ve decided to dig into some economic data from the emerging Asian economies in an effort to make an educated guess as to what may be the most likely outcome.
Our research shows that China, Taiwan, and Singapore have all experienced tremendous GDP growth during their economic recoveries. This growth has been driven by strong exports, which has allowed Asia to assume the role of the global growth leader. For many Asian countries, exports account for over half of their GDP.
However, the worry is that the European debt mess will negatively impact these fast growing economies and send countries such as China into a slowdown. Exhibit A in this scenario is the falling Euro. But while a weaker Euro means more expensive Asian exports, the data reveals that the Euro-Zone does NOT represent a very large share of total exports from Asian countries.
China is the widely touted as the country most vulnerable to the European turmoil. But our data shows that it only exports 14% of its total share to the Euro-Zone. China’s exports are actually more heavily weighted to other Asian countries (47%) and the U.S. (18%).
Malaysia and Taiwan follow, but only export 7.8% and 7.5%, respectively to the Euro-Zone. The point is that while a falling Euro may reduce Asian exports to European countries, the Euro-Zone only accounts for a sliver of Asia’s total exports. Thus, it follows that an economic decline in Europe should not severely impact Asian growth.
Although not at great risk, China is the most vulnerable to fluctuations in the Euro from a statistical standpoint. This would suggest that China would be a relatively higher risk play than some of its emerging market counterparts. However, data suggests that emerging Asia export growth has had virtually no relationship with the year to year change in the trade weighted euro. Basically, there is no significant evidence that a fluctuating euro affects Asian exports. According to the latest figures, current export growth in Asian economies remains strong.
Unless the European debt crisis brings about a significant slowdown in the global economy (U.S. in particular), or global trade restrictions increase, Asian economies seem poised to continue exhibiting strong growth via robust exports, at least in the short term.
If investors are looking for a lower risk emerging market play, India may be the answer. Our work suggests that India is unique for a few key reasons.
- Domestic Demand: India is not an export-driven country. It is an insulated country that booms on local demand, and is not subject to the fluctuations of international markets or currencies.
- Demographic: India’s middle class is larger than the entire population of the US. This allows the country to produce robust amounts of domestic economic activity.
- Protection: India has put in place protective business policies that defend domestic companies from direct international competition.
While India and China are two very different countries with very different economies, a case can be made for both when looking at potential emerging market investments. However, from our perspective, we favor India at the present time.