‘All countries now are created equal‘
By Kim Da-ye
After observing pensioners’ violent protests against the debt-struck Greek government’s austerity plans, one can easily forget that Greece is, after all, a developed market.
In financial markets where a country’s economic status is quantified and simplified into numbers or alphabets, the downfall of Greece, represented by the credit rating cut to junk status, is only a part of a transformation in the world’s economic order.
Pablo Goldberg, head of global emerging markets research at HSBC Securities, calls that transformation a “big convergence” between developed and emerging markets.
“Emerging markets start to be seen in different light. That’s led by their own merits and by the fact that those countries that were perceived to be risk free before now carry more risks,” Goldberg said in an interview with Business Focus during his trip to Asia.
The convergence defined by Goldberg indicates risks associated with investment.
In terms of economic growth, the two worlds are “decoupling.” The gap between the growth rates of the developed and the emerging has never been wider in the last 10 years, the strategist said.
Some different trends contribute to the blurring of the border between risk-free developed markets and riskier emerging markets.
The most visible one is the upgrade of emerging markets’ credit ratings and the downgrade of developed markets’.
While Brazil, India and Russia reached investment-grade status of BBB- or higher over the last decade, the U.S. and France recently lost their AAA status. Other triple A countries, Italy and Spain, went through a series of cuts, ending up with the credit ratings of BBB+ and A, respectively.
The risk premium on emerging markets’ bonds has also significantly shrunk.
Goldberg issued a report last December on the subject, which said that the spread between the sovereign bonds issued by emerging countries and U.S. Treasury bonds contracted from about 540 basis points on average between 2000 and 2004 to below 300 basis points between 2009 and 2011.
Furthermore, the strategist finds emerging markets are moving away from financing in U.S. dollars or other globally accepted currencies but doing so locally with their own currencies.
“I think it is the crux of the improvement in emerging markets’ credit ratings,” Goldberg said.
Adoption of floating currencies, whose exchange rate is determined in the markets through supply and demand, helped emerging economies to absorb shocks, he adds. Emerging markets’ central banks now use currencies to protect their economies largely by containing their appreciation.
“It’s the remedy emerging markets have fought very hard to obtain,” he said.
He also points at improvement in credibility of macroeconomic management as an important factor of the big convergence.
Goldberg expects the two worlds to continue to converge.
He said that some emerging markets are likely to get credit rating upgrades. For instance, Standard & Poor’s has a positive outlook on Turkey, Indonesia and Chile while Moody’s Investment Service on China and Turkey.
On concerns over the hard landing of the Chinese economy, Goldberg says it is unlikely to happen considering that there are no domestic crisis in China and that the government has “very high” ability to react.
HSBC has projected China’s GDP growth rate at 8.6 percent for this year.
In the meantime, Goldberg sounds relatively pessimistic on the recovery of the U.S. and Europe.
In a presentation he prepared for Asian clients, he points out that the global economic recovery is founded on weak roots; strong employment gains in the U.S. appeared to have been only temporary; and the political landscape is more than usually uncertain.
“A not too hot economy leads the largest central banks to keep loose monetary policies for longer,” Goldberg said.
“This might look like a narrow path, but it is one we believe is going to stick for the foreseeable future.”
Goldberg believes that the convergence would have significant impacts on allocations of capital around the world — more emerging markets with investment grade means more money flowing into them.
The strategist, however, warns that appreciation of emerging markets’ currencies as a result of capital inflow could lead currency wars.
Then is now a better time for Korea to stay in the category of emerging markets?
Korea, stuck in the border between developed and emerging markets, have wished for a long time to join the upper tier of investment destinations.
MSCI, a global provider of financial indices, has maintained Korea’s emerging market status after reviewing for three years if it should be upgraded.
The domestic market is nearly certain that MSCI will finally shift Korea into the basket of developed markets this June.
Asked if the move would be good for Korea, Goldberg says that the largest pool of money is geared toward the categories of developed markets while what’s hot today is emerging markets.
“The world is moving away from such categories anyways. There are several different ways to cut the same cake. None is perfect,” the strategist said.
“The theme is losing traction now. Today, it is fast growing vs. slow growing countries.”