DUE DILIGENCE: Is The Sun Finally Rising Over Emerging Markets?
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Japan, it may surprise you to learn, has the highest level of government debt to GDP of any country—at 250 percent. That’s higher than government debt ratios in Greece, Spain, Italy or Ireland. Brett Gallagher, MBA, of Artio Global Management, a registered investment adviser, pointed this out during his talk on emerging market development, market implications and investment opportunities at the IMCA 2012 New York Consultants Conference Monday. Japanese households have been big buyers of that government debt, providing a kind of buffer, but that’s beginning to come to an end, he says, which could have dire implications for the country.
Of course, balance sheet weakness is a problem across the developed world, which puts emerging market economies in a strong position relatively speaking. It’s one major reason Gallagher says emerging markets are still a good bet for the long run, in spite of ongoing fears that they are overheated or overvalued.
Over the past 30 years, the story in emerging markets has been that they were always the promise of tomorrow. In the 80s and 90s, they seesawed between periods of strength and collapse and were stuck at around 15 to 20 percent of world GDP. But in the past decade they have finally begun to break out of this cycle due to some structural changes, Gallagher says, including China’s membership in the World Trade Organization as of 2001 and the inclusion of 12 Eastern European countries in the European Union, which loosened trade barriers. Going forward, there will be more positive structural changes, he predicts. Looking out over the next decade, the BRICs alone should go from 17 percent of world GDP today to 27 percent, he said, with India and China in the lead.
Gallagher also likes emerging market valuations. In China, for example, price to earnings ratios are as low as they’ve been in the last 20 years, he says. Some people say they’re expensive, and that’s true on a relative basis, but on an absolute basis, they’re pretty attractive, according to Gallagher.
Of course, some countries are more promising investments than others. One good gauge to look at is which way the winds of economic freedom are blowing in a particular country. He likes the Heritage Foundation Index of Economic Freedom, and says investors should see how a country has performed on this scale over the past decade. Big changes in a positive direction are more important than the overall score because that is a predictor of more improvement and greater growth down the line. Big changes in a negative direction don’t bode well.
One audience member asked whether political changes expected in China would derail the country’s growth trajectory, but Gallagher said the only thing that could really upset that growth is popular protest, and that will only happen if there is high unemployment, something about which he said political leaders are keenly aware. Job growth will be their No. 1 economic goal, he predicts.
Check out the full presentation here. Artio actively invests in global equity and fixed income markets primarily for institutional and intermediary clients. Headquartered in New York, it also has offices in Los Angeles, Toronto, London and Sydney.
Read more from features editor Kristen French on her blog, Due Diligence.
