EDITOR: | December 21st, 2012

The Top Five Emerging Markets for 2013

| December 21, 2012 | No Comments
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radarAs the final week of 2012 approaches, analysts and bankers have already started outlined macroeconomic and investment scenarios for 2013. While the United States and Europe still have important hurdles to overcome, expecting moderate growth at best, there is a general consensus that emerging markets will be one of the hottest investment topics in the New Year. Of course, not all emerging markets are equal. After a veritable boom in the past decade, the BRIC’s (Brazil, Russia, India, China) economies have become more mature and the opportunities there should be approached as one would more mature economies.

There seems to be a bullish consensus from money managers on Asia, while some of the more adventurous among them have also started to consider Africa, where many countries have ‘quietly’ even been recording double digit  growth rates, such as Ethiopia. There are also emerging markets within the ‘developed’ and stagnating Europe, such as Romania (+2.5% in 2011), Bulgaria (+2.8% in 2011) or Poland (+3.5% in 2011), which have been growing at almost BRIC levels or substantially faster than developed economies. Most of the economies in Eastern Europe have been weakened in the wake of the slowdown in the Eurozone but the growth may have already reached its lowest levels in most countries. Inflation will fall even further, and in most economies there is no room to stimulate growth through monetary easing. The average growth is expected to increase from 2.7% in 2012 to just over 3% in 2013. In this context, the weaker economies are expected to remain in recession, while the strongest will experience a double-digit growth.

This is good news for emerging markets, because as the developed economies head toward ‘normalcy’, they too will start seeing gains.2013 could be the beginning of a new normal, where the economies and markets of Eastern Europe will be freed partially from the crisis, even if the opportunities and gains of the years that preceded the financial meltdown will have to wait a while. The following are some of the emerging markets to watch in 2013, a year that promises to be some kind of return in terms of political, economic and financial stability around the world. It should be a surprise that the maturity of the BRIC’s, while perhaps less exciting than in previous years, add to their value in the emerging market sector and inevitably they remain top picks.

Brazil – The country is continuing to show good economic growth (at about 4% in 2011), even if not as stellar as the past years. Nevertheless, Brazil has almost ‘emerged’ fully, which leaves it less exposed to the risks of the other BRICS. In keeping with its more mature economic structure, Brazil will be tackling the issues faced by more mature economies. In 2013, there are expectations of various reforms from labor to taxation and a focus on infrastructure in view of the two major global sporting events that will take place respectively in 2014 (World Cup) and 2016 (Olympics ). The Brazilian economy has been marked by a remarkable reduction in unemployment and internal consumer demand is high – real estate and housing opportunities will be very interesting. Brazil is also buttressed by high oil, gas and mining opportunities as well as South America’s most diversified and largest manufacturing sector, from cosmetics, shoes and fashion to aircraft and cars; Brazil makes it all.

Russia – Moscow and its index MICEX index represent a good opportunity for 2013 and low valuations represent a boost. The Russian markets are also buoyed by the high price of Brent crude oil, the oil of the North Sea. Russia’s consumption patterns have also evolved considerably over the past few years and the country should continue along a path of high growth in housing and high end consumer goods. As an example, ten years ago the average Russian citizen had to save 3.2 years to be able to afford a Russian made automobile and 14.6 years to buy a foreign made one, Today, those saving times have been reduced to 1.1 years and 3.4 years respectively according to the Russian automobile consumer statistics agency Avtostat.

India: Structural reforms have encouraged energy companies while the retail sector has been opened to investment from foreign operators.  This latter development, in particular, makes India a good market in which to invest in 2013. The increase of GDP this year (+5.5%) bodes well for 2013 (expected +6.5%) and for 2014 (expected +7%). Analysts recommend increasing portfolio exposure to India.

China – After a year and a half of struggling to contain rising inflation and domestic under-consumption, according to many analysts, China should recover some lost ground in the markets. In China’s favor, there are low valuations and strong expectations of corporate earnings growth. The renewed Chinese leadership under Xi Jinping has also clearly stated its intention to promote more internal demand and more internally generated growth rather than rely solely on exports.

South Africa – While there have been problems in the mining sector, owing to strikes in gold mines and a particularly violent incident last summer, South Africa appears to have a stable political leadership. President Zuma has been reconfirmed as having a good hold on his Party in view of opposition from the more radical wing of the African National Congress. South Africa’s low valuations and strong profitability offer a good mix that maintains South Africa’s potential.

Apart from the BRICS, noted above, there are other interesting emerging markets for investors to consider. One of the main ones is Turkey and another is Indonesia. Both countries are expected to see GDP growth rates of between +4% and +6%. These rates make Indonesia one of the smallest and lucrative emerging markets in recent months.

Turkey has become by all indications the new emerging regional power in the Mediterranean, and it continues to show signs of good health. By the end of 2013, Turkey will have finished paying all its debts with the IMF, according to Prime Minister Recep Tayyip Erdogan. Turkey has already ‘returned the majority of the $ 23.5 billion received from the IMF in 2002. Since 2002, Turkey’s annual growth rate was 5.3% (8, 5% in 2011) while the average income per capita has risen steadily reaching USD$ 10,444 in 201, making Turkey the 16th-largest economy in the world. Moreover, Turkey has been growing while the its neighbors declined, seeing as, according to the prime minister, the country is better off today than before the global financial crisis of 2008.

Indonesia represents a promising long term opportunity. Its GDP growth met the highest expectations at about 6% for 2011; however, what makes this country an interesting long bet is that it has a young population, a new class of consumers and a rapid urbanization rate. The kind of consumption growth rate that is expected will place Indonesia behind only China and India in the next two decades. GDP for 2012 should remain above 6% given the quarterly results averaging 6.3%. Indonesia, once reliant on mining resources and oil, has become an important manufacturing power and activity in this area has shown rapid growth, driven by domestic and regional demand.

As emerging markets mature further – and only a few opportunities were mentioned here – evolving a more sustainable growth pattern, domestic demand will also add to their overall GDP, translating to greater political and economic stability, making investments less risky in the process. In 2013, the overall world economy should start to reverse its ‘safety’ mode – or bearish sentiment – that has ensued since the 2007-2008 crises and the IMF predicts that even sluggish Europe will start to see an upside. Italy will have an election, which should confirm the political demise of Berlusconi and his twenty years disastrous political legacy, which have in turn affected the Euro. He has announced an intention to run again in political elections to be held at the end of February, but the rise of a new centrist political party led by the much praised Mario Monti will inaugurate a new centrist formation that should deal Berlusconi the final blow. The markets have already reacted to this very strong possibility, as the spread between 10-year Italian and German government bonds, which has been one of the barometers of the Eurozone’s economic health, has dropped to its lowest level in over a year. The spread between German and Greek bonds has also dropped, as a modicum of confidence appears to have been restored in Greece.


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