The Emerging Markets ex-China are a bit weaker
At a cyclical level, Ray Dalio, founder, and CEO of the world’s largest hedge fund, Bridgewater Associates, sees the Emerging Markets ex-China in a weaker position than the developed markets (EFA) (VEA). “Overall, cyclical conditions in EM ex-China (FXI) (YINN) are a bit weaker than in the developed world,” stated Dalio in his “Big Picture” post. He pointed to the balance of payments positions of many of these larger countries as a key factor responsible here.
Brazil’s (EWZ) current account to GDP ratio has been in the negative since 2008, albeit recovery has been fast seen since 2014. Russia (RSX) has seen a rather volatile current account to GDP ratio over the last few years, recording a 1.8% current account surplus to GDP in 2016. Such volatility does leave the short-term outlook for these emerging markets (EEM) (VWO) rather feeble.
Stronger longer-term picture
However, “the longer-term picture is comparatively stronger,” said Dalio. Productivity growth has continued to improve moderately in these markets. Annual growth rate in real GDP per capita since 1970 came in at 2.4%, while that for the last 10 years stood higher at 2.6%, reflecting a moderate rise in productivity level over the last 10 years.
On the other hand, we’ve seen productivity growth slowing and in some cases even receding, across much of the developed (EFA) (VEA) world. Moreover, on the debt front, the emerging markets ex-China sport lower debt relative to the rest of the world.
Distance from the GDP gap points to weak conditions, tough growth can be seen rising toward potential. Expected total return from a 50/50 (equity/debt) portfolio hovers between 4% and 6%. Consequently, the risk premium (expected –cash rate) for the emerging markets excluding China, lies near 2%.