Emerging markets face tough transition to developed status — Standard Life’s Hudson

It is much harder for countries to make the transition from emerging to developed economies than was previously commonly thought, according to global thematic strategist Frances Hudson at Standard Life Investments.

In the latest edition of SLI’s Global Perspectives she looks at what defines an emerging economy, and the measures used to determine the move to a developed economy, concluding that emerging economies are unlikely to sustain rapid growth unless the developed world is also in growth mode.

“According to the World Bank, only 13 countries have moved from upper middle to high income – one of the measures of a developed economy – since 1960. Of those, five are the Asian tigers; others include Greece, Ireland, Spain and Israel,” writes Hudson.

“In considering the investment potential of emerging-market asset classes, it is clear that they are open for business. However, if growth is the objective, it may be captured better in the early stages by investing in the currency or government bond market, first hard currency then local, rather than equities.”

“Much of the rise in emerging countries’ share of global GDP and markets is tied to currency appreciation. Strong economic growth does not necessarily translate into strong equity market performance just as gains in equity markets do not necessarily reflect economic progress.”

She said emerging economies cannot grow in isolation. “The strongest conclusion must be to consider the lack of persistence in growth differentials and rethink straight-line projections as a prima-facie case for indiscriminate investing in emerging markets.”

Read the full report here:



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