Emerging markets growth drivers in ‘new normal’

Emerging markets Poland, Latin America and China are the new drivers in growth as the global investment landscape is permanently impacted by the global financial crisis, PIMCO analyst Michael Gomez said. 
 
With lower growth, greater regulation and a higher savings rate in the developed world, Gomez warns against “shrugging off the systemic implications of the financial crisis and pricing markets for an ‘old normal’ recovery”.
 
This means traditional investment options might not be as attractive as they used to be.
 
“Asia and China will lead global growth in the ‘new normal,'” he said.
 
“China’s resounding recovery is driven by a surge in fixed asset investment targeted at infrastructure and developing the Chinese hinterland,” Gomez said.
 
“This focus on infrastructure is critical to maintaining high levels of productivity and higher trend growth.”
 
However, he warns that China’s efficacy with investments in the long run depends on how well Chinese leadership has allocated this capital.
 
Investors should look into Poland. It is the only country in Europe (whether old or emerging) that is expected to register full year positive real GDP growth in 2009, according to Gomez.
 
This has been attributed to its strong domestic orientation, credible institutions and flexible exchange rate.
 
However, investors are advised to minimise exposure to Hungary, Romania and the Baltics. With its high levels of foreign-exchange denominated-debt, a potentially explosive debt dynamic is created and will hinder adjustments through the currency channel, he said.
 
Additionally, these countries lack immediate access to financing in periods of distress.
 
Gomez said that Latin America is “a middle ground in crisis recovery” as it suffered less than emerging Europe but has performed moderately against Asia.  
 
Peru and Brazil have found favour as an investment option, having received upgrades by credit ratings agencies- rare in these times of economic turmoil.
 
Both countries remained sturdy through the crisis, with their high international reserves, ample monetary and fiscal policy flexibility and strong ties with multilaterals which allow for quick access to emergency financing.
 
Brazilian and Mexican local bond markets are good picks as well, he said. 
 
“Real yields in Brazil are by far the highest in the world and currency valuations in Mexico are significantly cheaper than historical averages,” he said.

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