Christine Lagarde of the IMF sees a 3-speed economy (Part 3)



Continued from Part 2

Emerging markets and developing countries

This is the third of Lagarde’s three economic groups.

Emerging Markets vs China vs Brazil 2013-07-31

This group includes developing regions such as Southeast Asia, with countries such as Indonesia (IDX) and  Malaysia (EWM), and Sub-Saharan Africa (AFK), currently the two fastest-growing regions in the world. Latin America (ILF) has also been a region of fast economic growth thanks to fund flows spilling over from monetary easing in the United States.

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Of course, this third group also includes the usual suspects, such as Brazil (EWZ), Russia (RSX), India (PIN), and China (FXI), jointly known by the acronym BRICs (BKF), which nowadays means just a group of disjointed countries with little in common except for the fact that among emerging markets, these are now the slowest-growing countries.

Built-in resilience

Emerging markets and developing countries are the fastest-growing segment, though not all emerging markets are created equal. What most emerging markets and developing countries do have in common is the fact that most have dealt with some kind of financial crisis in the past. Their economies have recently learnt to adapt to harsh economic conditions, such as hyperinflation, high interest rates, low credit availability, and lack of regulation. This has made their economies more robust and kept them resilient during the recent financial crisis.

Most of these countries went last into the crisis and emerged first, having entered and exited in positions of strength. This was the engine of growth throughout 2012.

Different speeds

As we’ve seen, the BRICs are currently the slowest in the pack, and the dynamics within each of these countries vary significant. The fastest-growing countries are developing Asia and sub-Saharan Africa, which have benefited from productivity gains copied from other developed markets—effectively skipping a lot of the harsh learning.

Now that you know the three key groups, which would you focus your investment on?

Be careful with your choice. Read the following two pieces that focus on Brazil and China specifically.

  1. Why Brazil’s equity market keeps dropping (Part 1)
  2. China hints at potential stimulus, but will it follow through? (Part 1)

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