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The world is in the midst of another “growth scare” as has been the case in each of the past three years. Economic data is rolling over in many countries around the globe as negative surprises outnumber positives, as I pointed out last week.
And as first-quarter earnings reports reach a climax over the next few weeks, investors are nervously watching sales and profit estimates get pared back for 2013.
This growing uncertainty has markets on edge because we all remember the springtime-swoons that disrupted financial markets like clockwork in 2010, ’11, and ’12. And you only have to take note of the recent plunge in crude oil, gold, and copper prices to see the forces of deflation have the upper hand at the moment.
Against this backdrop, the International Monetary Fund (IMF) last week updated forecasts in its World Economic Outlook report. I’ll spare you the full 204-page document by giving you the highlights here including where — in a persistently slow-growth world — the best profit opportunities may be found today.
Trading Places
It’s no surprise, considering the current backdrop, why the IMF took a knife to its numbers, downgrading growth forecasts around the world … but there are a few bright spots.
Output growth worldwide will expand just 3.3 percent in 2013, revised down from 3.5 percent in January. But the global recovery since the Great Recession is following divergent paths in different parts of the world.
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| Thanks to solid domestic demand, the ASEAN region has largely avoided the growth slowdown in advanced economies. |
The IMF notes: “Specifically, this recovery has been the weakest for advanced economies (U.S., Europe, Japan, etc,) and the strongest for emerging markets.” Historically, it has been just the opposite as the U.S. and other developed nations were the “engine of previous global recoveries” while emerging markets followed.
But this time around, advanced and developing economies have traded places, with the emerging world accounting for “the lion’s share” of the current recovery, and for good reason.
The U.S., Europe, and Japan have been burdened during the recovery by sky-high public debt levels and chronic fiscal deficits. The predictable outcome has been persistent deleveraging, tight credit conditions and a high degree of economic policy uncertainty.
Meanwhile, emerging markets benefit from an average public debt-to-GDP ratio of just over 30 percent — compared to 125 percent for the G7 economies (Canada, France, Germany, Italy, Japan, UK, US). The result: Healthier credit conditions and much more robust domestic demand in the emerging world compared to developed nations.
Real private consumption growth in emerging markets is expanding better than 6 percent annually (chart above), compared to anemic consumption growth of just 1.5 percent in advanced economies.
Although the advanced economies of the world have taken a back-seat during the current recovery, it is certainly NOT without trying to juice things with ultra-easy monetary and fiscal policies.
As Good as It Gets
Economically, emerging markets have been the best performers since the global recession. Not only have they fully recovered from the Great Recession, but emerging markets are now expanding at above-trend growth rates (chart below) compared to the advanced economies of the world where output remains well below trend.
To find the best growth prospects in emerging markets today however, you must look beyond the traditional BRIC countries (Brazil, Russia, India and China).
Although collectively this group still offers robust growth, the IMF recently marked down its forecasts for each country. Meanwhile, Emerging Asia is set to experience accelerated growth with GDP forecasts of 7.1 percent this year, expanding to 7.3 percent in 2014.
Perhaps the most dynamic economies in the region are members of the Association of Southeast Asian Nations (ASEAN), which includes: Indonesia, Thailand, Malaysia, Thailand, and the Philippines.
Thanks to solid domestic demand, the ASEAN region has largely avoided the growth slowdown in advanced economies, which has even hurt China’s exports. But these nations have become increasingly competitive in manufacturing production and are benefiting in a big way from supply-chain links with China and Japan.
In fact, direct and indirect demand from China and Japan are nearly as important to ASEAN growth as demand from the U.S. and Europe. Unemployment in the region is at multi-year lows, which is fueling increased domestic consumption and investment.
Plus, with slow-growth nearly everywhere else on earth, global investment capital is fleeing Europe and flowing into the faster growing ASEAN region, which helped propel stock markets up by 10-to-20 percent across the region last year and so far in 2013.
Bottom line: Economic and financial conditions in Emerging Asia are as good as it gets in today’s slow-growth world. One way to tap into this growth potential — in a single trade — is with the Global X FTSE ASEAN 40 Index ETF (ASEA). This ETF features a diversified basket of 40 leading companies in the region. Or, if you prefer taking more of a rifle-shot approach with single-country ETFs, consider the iShares MSCI Philippines ETF (EPHE) or the iShares MSCI Indonesia ETF (EIDO). Both recently notched new 52-week highs, even as markets in the advanced economies appear to be starting a correction.
Good investing,
Mike Burnick
Mike Burnick, with 30 years of professional investment experience, is the Executive Director for The Edelson Institute, where he is the editor of Real Wealth Report, Gold Mining Millionaire, and E-Wave Trader. Mike has been a Registered Investment Adviser and portfolio manager responsible for the day-to-day operations of a mutual fund. He also served as Director of Research for Weiss Capital Management, where he assisted with trading and asset-allocation responsibilities for a $5 million ETF portfolio.