Hamish McRae: 'Old world' opportunities remain with higher returns from developed economies

Economic View: If Greece has gone one way, parts of China have gone the other. Shanghai is in many respects a first-world city

If the emerging countries are growing much faster than the developed ones, why has the performance of their share markets been so much worse? This week, for the first time as far as financial markets are concerned for the best part of a century, a developed country has been downgraded in status to an emerging one. The country is Greece and the agency that downgraded it is the New York-based MSCI. That news was unsurprising but it does rather underline the confusion investors face when allocating their savings.

The deal used to be that you would expect to get higher overall returns from emerging markets but such investments would carry greater risks. What has happened in Turkey is a case in point: it has been a very fast-growing economy and seemed to offer a reasonable degree of political stability, but suddenly that stability was shattered.

Over the past couple of years, however, the general mood has changed, for some of the highest returns have come from developed markets. Despite recent reverses Japanese shares are still up 58 per cent over the past year. But so too have some of the greatest adverse shocks. I cannot think of any recent occasion when banks in an emerging economy have been forced to give a "haircut" to large depositors. Yet that is what Cyprus has been required to do by the eurozone authorities and the International Monetary Fund.

So developed markets can give higher returns, but also bring higher risks. What should we make of that?

A couple of basic points and then a wider thought. The first basic point concerns growth. The emerging world, taken as a whole, did not experience a recession in 2008-09. In that sense it was not a global recession at all, but one of the developed world. As you can see in the top graph, emerging-market GDP dipped to around 2 per cent a year but then recovered to something close to its pre-crisis rate. However, there has been some slow down, for growth is running now at around 6 per cent, rather than the 9 per cent-plus in 2006-07. The forward-looking emerging markets index calculated by HSBC, the red line in the top graph, remains positive, but is also a touch below the pre-crisis levels.

Nevertheless, that 6 per cent growth does remain way above that of the developed world. If you take industrial production, you can see from the bottom graph how it remains pretty solid in the emerging markets but very uneven in the developed ones: the red line is both more stable and higher than the blue line.

The second point is that the emerging markets are an extraordinarily diverse bunch. It is a convenient catch-all expression, but rather like the BRICs (Brazil, Russia, India and China) acronym, it gives a spurious consistency to economies that are utterly different in every way from economic development to political organisation.

The emerging world is much less homogeneous than the developed one. That makes it harder to develop a consistent investment strategy, for what works in one country won't work in another.

Now the wider thought. It is that the distinction between developed and emerging is going to disappear. It was appropriate for a moment of time but the boundaries are becoming increasingly blurred. If Greece has gone one way, parts of China have gone the other. Shanghai is in many respects a first-world city, though it lags in some areas. It has been estimated that Shanghai labour costs will be the same as US costs in another four or five years, forcing labour-intensive activities out of China and towards other lower-waged "still-emerging" markets. Indeed, that has already begun.

So what will happen is that the investment process in the emerging world – let's keep the distinction for the moment – will become much more similar to that of the developed world. There will be a judgement about political stability and the currency risk, but you have to make those judgements now in the developed world. There will be a second set of judgements about the rule of law and the enforcement of property rights. Those for the moment seem quite a lot more secure in the developed world than in many emerging economies, but that may change. There will be a further set of judgements about the impact of regulation and taxation. Here you could argue that regulatory and taxation risk is probably rising in the developed world but falling in many emerging countries. And so on.

None of this explains the upheavals in emerging-market securities over the past couple of months. I think what has happened here, and it is an over-simplification, is a shift in fashion. It has been profoundly fashionable for the past four years to buy the "shift investments to fast-growing economies" argument. Now, with the growing evidence that the developed world is securely in a growth phase, that fashion has slipped downwards. There is an argument that because of the recovery in the West the growth phase may actually be rather longer in duration than it was in previous cycles. There is and will continue to be a big gap in growth, but the prospect of somewhat slower growth in the emerging world and somewhat faster in the developed will narrow that gap a bit. And if the growth phase is to last another five or more years, well, there will be many opportunities in the "old world".

A final thought. One of the curious features of the past few years has been the outflow of capital from the emerging world to the developed one. Many investors in the fast-growing regions have chosen to place their funds in the slow-growing ones. Diversification makes sense for both sides.

Suggested Topics
Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
News
ebooksNow available in paperback
Arts and Entertainment
Tony Hughes (James Nesbitt) after his son Olly disappeared on a family holiday in France
tv
Arts and Entertainment
The Apprentice candidates Roisin Hogan, Solomon Akhtar, Mark Wright, Bianca Miller, Daniel Lassman
tvReview: But which contestants got the boot?
Arts and Entertainment
Jim Carrey and Jeff Daniels ride again in Dumb and Dumber To
filmReview: Dumb And Dumber To was a really stupid idea
Extras
indybest
Sport
Scunthorpe goalkeeper Sam Slocombe (left) is congratulated by winning penalty taker Miguel Llera (right)
football
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Marketing Services Manager - (communications, testing, DM)

£32000 - £35000 per annum + benefits: Ashdown Group: Marketing Services Manage...

Guru Careers: Finance Account Manager

£Neg. (DOE) + Excellent Benefits: Guru Careers: A Finance Account Manager with...

Ashdown Group: Java Developer - Hertfordshire - £47,000 + bonus + benefits

£40000 - £470000 per annum + bonus: Ashdown Group: Java Developer / J2EE Devel...

Ashdown Group: Direct Marketing Manager - B2C, Financial Services - Slough

£45000 - £55000 per annum + Benefits: Ashdown Group: An exciting opportunity h...

Day In a Page

Jeb Bush vs Hillary Clinton: The power dynamics of the two first families

Jeb Bush vs Hillary Clinton

Karen Tumulty explores the power dynamics of the two first families
Stockholm is rivalling Silicon Valley with a hotbed of technology start-ups

Stockholm is rivalling Silicon Valley

The Swedish capital is home to two of the most popular video games in the world, as well as thousands of technology start-ups worth hundreds of millions of pounds – and it's all happened since 2009
Did Japanese workers really get their symbols mixed up and display Santa on a crucifix?

Crucified Santa: Urban myth refuses to die

The story goes that Japanese store workers created a life-size effigy of a smiling "Father Kurisumasu" attached to a facsimile of Our Lord's final instrument of torture
Jennifer Saunders and Kate Moss join David Walliams on set for TV adaptation of The Boy in the Dress

The Boy in the Dress: On set with the stars

Walliams' story about a boy who goes to school in a dress will be shown this Christmas
La Famille Bélier is being touted as this year's Amelie - so why are many in the deaf community outraged by it?

Deaf community outraged by La Famille Bélier

The new film tells the story of a deaf-mute farming family and is being touted as this year's Amelie
10 best high-end laptops

10 best high-end laptops

From lightweight and zippy devices to gaming beasts, we test the latest in top-spec portable computers
Michael Carberry: ‘After such a tough time, I’m not sure I will stay in the game’

Michael Carberry: ‘After such a tough time, I’m not sure I will stay in the game’

The batsman has grown disillusioned after England’s Ashes debacle and allegations linking him to the Pietersen affair
Susie Wolff: A driving force in battle for equality behind the wheel

Susie Wolff: A driving force in battle for equality behind the wheel

The Williams driver has had plenty of doubters, but hopes she will be judged by her ability in the cockpit
Adam Gemili interview: 'No abs Adam' plans to muscle in on Usain Bolt's turf

'No abs Adam' plans to muscle in on Usain Bolt's turf

After a year touched by tragedy, Adam Gemili wants to become the sixth Briton to run a sub-10sec 100m
Calls for a military mental health 'quality mark'

Homeless Veterans campaign

Expert calls for military mental health 'quality mark'
Racton Man: Analysis shows famous skeleton was a 6ft Bronze Age superman

Meet Racton Man

Analysis shows famous skeleton was a 6ft Bronze Age superman
Garden Bridge: St Paul’s adds to £175m project’s troubled waters

Garden Bridge

St Paul’s adds to £175m project’s troubled waters
Stuff your own Christmas mouse ornament: An evening class in taxidermy with a festive feel

Stuff your own Christmas mouse ornament

An evening class in taxidermy with a festive feel
Joint Enterprise: The legal doctrine which critics say has caused hundreds of miscarriages of justice

Joint Enterprise

The legal doctrine which critics say has caused hundreds of miscarriages of justice
Freud and Eros: Love, Lust and Longing at the Freud Museum: Objects of Desire

Freud and Eros

Love, Lust and Longing at the Freud Museum