The Great Debate

As companies in mature markets compensate for modest growth at home by trying to boost their presence in emerging economies, they are encountering intense competition from increasingly confident local players. Aggressive and nimble enterprises in China, India and elsewhere may pose some threat, but the real challenge in these high-growth markets is more complex. And it is affecting companies from all markets, not just those in North America, Europe and other developed economies.

The important transformation in the global landscape is not so much the shift to emerging economies but the extraordinary growth in business activity among emerging market countries. When American companies target Brazil or India, for example, they should know that China has displaced the United States as the largest trading partner of both. We at Accenture predict that trade between emerging economies is about to overtake that between developed economies.

Thus, companies need to tackle the diversity of growth opportunities and the pace of change if they are to succeed. Clearly, emerging market companies have some advantages at home. They have established relationships and the ability to leverage scale advantages with low costs and, in some cases, government support. They have faced similar challenges in their home countries, such as dealing with infrastructure deficits and scarce or unreliable data. They are increasingly doing business with one another, growing across one another’s borders and gaining insights and experience on how to best serve one another’s markets. This gives them an inherent advantage over competitors from mature economies unfamiliar with operating in such conditions.

As these companies expand beyond their borders, the competitive picture becomes more balanced. The evidence suggests that business leaders – no matter whether they are from mature or emerging markets ‑ are not confident of achieving success. According to Accenture research on almost 600 senior executives from multinational companies around the world, 40 percent said they lack a strategy or the operational capabilities to grasp opportunities in these markets. More than half said they need to fundamentally rethink their strategies to compete in them.

What are the best ways to tackle emerging markets?

Rather than prioritizing traditional target markets, such as neighboring countries or countries with a common language, progressive companies identify consumer segments in particular cities or customer segments that may straddle national borders. For example, Procter & Gamble identified the needs of male consumers in areas with scarce water supplies and designed grooming products for this group in multiple markets. Within three months of launch, one shaving product became the best-selling product of its kind in India.

Could the dreaded R word come back to haunt the developing world? A study by Goldman Sachs shows how differently financial markets and surveys are assessing the possibility of a recession in emerging markets.
One part of the Goldman study comprising survey-based leading indicators saw the probability of recession as very low across central and eastern Europe, Middle East and Africa. These give a picture of where each economy currently stands in the cycle. This model found risks to be highest in Turkey and South Africa, with a 38-40 percent possibility of recession in these countries.
On the other hand, financial markets, which have sold off sharply over the past month, signalled a more pessimistic outcome. Goldman says these indicators forecast a 67 percent probability of recession in the Czech Republic and 58 percent in Israel, followed by Poland and Turkey. Unlike the survey, financial data were more positive on South Africa than the others, seeing a relatively low 32 percent recession risk.
Goldman analysts say the recession probabilities signalled by the survey-based indicator jell with its own forecasts of a soft patch followed by a broad sustained recovery for CEEMEA economies.
"The slowdown signalled by the financial indicators appears to go beyond the ‘soft patch’ that we are currently forecasting," Goldman says, adding: "The key question now is whether or not the market has gone too far in pricing in a more serious economic downturn."

Manoj Pradhan, left, a global EM economist, is an executive director at Morgan Stanley. Alan M. Taylor, right, a senior advisor at Morgan Stanley, is a professor of economics at the University of California, Davis. The opinions expressed are their own.

Policymakers have fretted about global imbalances for nearly a decade, but little consensus or clarity has emerged. Some saw problems created by surplus countries, others deficit countries. Many feared a fiscal-cum-balance of payments crisis in the U.S., but the crisis we got reflected private/financial failures. G20 proposals for collective action remain a work in progress. Uncoordinated policy actions triggered talk of currency wars.

As these debates drone on, there may be less cause for concern about global imbalances. Emerging market-developed market (EM-DM) relationships may revert to a more typical historical pattern. We highlight key areas of global adjustment in this scenario: shifts in capital flows, exchange rates and real interest rates.

Most commentators and oil analysts are convinced a further rise in prices is inevitable in the next few years as emerging market consumption grows and supplies increasingly come from more costly and technically challenging sources such as ultra-deepwater.

While there are disagreements about the extent and the timing of price changes, there is a remarkable degree of consensus about the direction: up. But the roller-coaster experience of the last five years should have taught forecasters to be much more cautious about extrapolating trends and assuming the future direction is obvious.

Price forecasts are notoriously unreliable. There are simply too many variables and too much uncertainty about the current state of the market let alone how supply and demand will evolve in future. The crucial role of expectations in price formation adds an element to “reflexivity” which is hard for forecasters to anticipate or model accurately.

Ever since Goldman Sach's Jim O'Neill came up with the idea of BRICs as an investment universe, competitors have been indulging in a global game of acronyms. Why not add Korea to Brazil, Russia, India and China and get a proper BRICK? Or include South Africa, as it wants, to properly upper case the "s" - BRICS or BRICKS?

Completely new lists have also been compiled -- HSBC chief Michael Geoghegan has championed CIVETS to describe Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa (ignoring the fact, as Reuters' Sebastian Tong points out here, that a civet is a skunk-like animal blamed for the spread of the deadly SARS outbreak in Asia).

Fun though some of this is -- and no one can argue that BRICs has not had an impact -- there is a danger that the acronym could become more relevant  than the actual countries involved. For example, imagine Mexico, Uruguay, Panama, Philippines, Egypt, Turkey and Sierre Leone being lumped together because they spell MUPPETS.

-  Robert O. Abad is a senior research analyst and Matt Graves is an analyst for Western Asset.  The views expressed are their own. -

The landscape of global debt markets has changed drastically since the problems in Greece first arose earlier this year. Markets have been incredibly resilient in the face of sovereign-related problems, but the change in collective market psychology—in which a transition was made from an obsessive focus on the growth drivers of a global economic recovery to a careful consideration of the risks posed by the mounting stock of developed world public debt—has been the single most important driver of volatility this year.

From the vantage point of emerging markets, the pattern of events in the years leading up to the 2008 financial crisis offer a clear and disturbing parallel to the lesser developed countries’ (LDC) debt crisis of the early 1980s.  Global liquidity conditions fueled a debt-driven growth story in Latin America that ended with the region crumbling under the weight of massive debt and the US financial system facing potential insolvency.

Better growth, less debt and what is shaping up to be a very nice little supply and demand mismatch make emerging markets very attractive relative to the developed world.

Sure, China could go ‘pffft’ every now and then, and yes, there is potential for getting caught at some point on the wrong side of a deflating bubble, but boom and bust is the world in which we live. Stay in the developed world and you could get run over by the proverbial Greek bus on its way out of the euro or see your portfolio shot out from under you by the bond market vigilantes.

And, as the International Monetary Fund pointed out last week, emerging market returns have been better on a volatility adjusted basis, both during the downturn and the market recovery. Think about that: historically the trade-off in emerging markets has been that you try to capture a share of superior economic growth but bear the risks of higher volatility and a bigger chance of being abused as an investor by entrenched local interests.

-James Saft is a Reuters columnist. The opinions expressed are his own-

As we say goodbye to a decade so abysmal it never even earned a nickname, it is time to take bets on how the coming 10 years will shape up in economics and financial markets.

Welcome, then, to the Teenies, a word that will describe the decade as well as the small returns in financial markets and the shrinking financial sector it will bring.

So, let’s run through some themes for the 2010s:

Banking – The decade will end with meaningful reform of banking in place, but what is not clear is if this happens soon or only after a new banking crisis brought on by an unwillingness to take tough steps now. The likelihood is that regulation limits leverage and causes the share of the economy captured by financial services to shrink. It will be a lousy decade to be a shareholder, but given the government backing, perhaps not a bad one to be a bondholder.

(James Saft is a Reuters columnist. The opinions expressed are his own)

Easy money in the United States, a falling dollar and growing flows of funds seeking better returns in emerging markets are touching off a new round of capital controls in hot emerging markets, a trend that could accelerate and will at the very least increase market volatility.

It shouldn’t be a surprise, really; loose money in the developed world is helping to spur investment into emerging markets, driving currencies up and making local exports less competitive for countries which, unlike China, aren’t hitching a free ride as the dollar declines.

Inflation may be a threat for many of these, but with the global economy still struggling, it certainly won’t feel that way to policy makers.

- Jorge Maia is head of Research and Information for Industrial Development Corporation of South Africa, established in 1940 to promote economic growth and industrial development. The opinions expressed are his own –

Serious shockwaves are hitting Africa’s shores as the global economic crisis unfolds.

The extent and depth of the damage is extremely difficult to assess or project, but it is clear that the pattern of financial flows associated with investment, lending and trading activity has been dramatically altered, with detrimental economic and social implications for the continent at large. The adverse impact has been gradually spreading from a regional perspective – a serious setback to Africa’s recent growth performance, which had averaged 6 percent a year from 2003 to 2008.