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Global Top Cat

Will The Emerging Markets Bring Down The World?

By Yiannis G. Mostrous, on Feb. 22, 2014

However, a more rational view of the forces at play in the global economy suggests that the slow recovery from the 2008-09 financial crisis and downturn should continue in 2014.

Coupled with weak nonfarm payrolls, the 20 percent decline in the new orders component of the US manufacturing purchasing managers index (PMI) shocked investors and provided ample fodder for the talking heads to claim the bottom had fallen out of the economy.

However, investors shouldn’t give any credence to the suggestion that challenging economic conditions in China and other emerging markets are behind the US economy’s recent woes.

The new orders component of the EU’s PMI increased in January 2014, even though the region’s economy has three times as much exposure to emerging markets as the US.

And check out the recent divergence in US PMI data relative to similar indexes of business sentiment in the EU and Japan.

Whereas the US reading declined by 9.2 percent in January 2014, Markit’s PMI for EU manufacturers increased by 2.4 percent sequentially and hit its highest level since May 2011. Meanwhile, the Nomura/JMMA Japan Seasonal PMI ticked up by 2.5 percent last month.

Commentators who prefer to attribute the US slowdown to external forces gloss over the manufacturing sector’s strengthening outlook in the EU and Japan–not to mention a brutal winter that has weighed heavily on economic activity in America.

The simple logic behind this big leap: The market selloff originated in emerging markets, many of which find themselves paying the price for a failure to address certain fundamental challenges.  

Over the past four months, funds focused on emerging markets have suffered more than US$30 billion in outflows.

Although some of the formerly high-flying emerging markets face structural challenges, the longer-term growth story in these regions remain intact, giving patient investors an opportunity to add high-quality names in countries that run an account surplus.

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