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Will the Emerging Markets Lead the World to New Growth?
Just after the HSBC Emerging Markets Index was released showing a
marked slowdown in growth, HSBC Chief Economist Stephen King told CNBC
news that Emerging Markets
Hit a Bump in the Road. The is to be expected, with monetary
tightening occurring in China (see BoomBustBlog
China Focus: Interest Rates and BoomBustBlog
China Focus: Inflation?), austerity measures being applied en masse
in developed Europe (see The Pan-European Sovereign Debt Crisis) and the
potential for a double dip in the US and UK. He also says that there is
promise for the future, and I might even be inclined to agree with him,
it’s just that we need to get past the present first.
HSBC has a proprietary interest in the success of the emerging
markets for they are highly geared into their growth and well being.
With the developed nations of the west and Europe choking on debt
overhang, the emerging markets are HSBC’s key to growth, so it is very
much the case that Mr. King is talking his book – which is not
necessarily a bad thing, we just need to know all of the facts as they
are laid before us.
I have just released our HSBC forensic analysis for the second
quarter, and it is easily one of the most meaty reports that we have
accomplished this year with 26 pages (Pro/Institutional versions) of
fundamental, economic and macro analysis that truly picks apart both the
inner workings and the future prospects of this bank. Below are some
excerpts as applies to the topic of the emerging markets…
Below are the full forensic reports available for download to
subscribers (click here to subscribe):
HSBC 170610 Professional & Institutional
(554.65 kB 2010-07-07 06:23:52)
HSBC 170610 Retail (388.56 kB 2010-07-07
06:22:25)
We have performed a decent amount of analysis on HSBC in the past as
well, and it has served as a very profitable short position in 2008. I
have decided to release the dated analysis to the public for
free, it is available by clicking here: HSBC_Holdings_Report_04August2008 – pro (138.89
kB 2008-11-06 10:11:09)
For anyone interested in the myriad risks and opportunities abound in
the HSBC market’s macro environment, I strongly suggest you review our
sovereign contagion models (subscribers only):
Sovereign Contagion Model – Pro &
Institutional (1003.48 kB 2010-05-04 12:30:48)
Sovereign Contagion Model – Retail (961.43 kB
2010-05-04 12:32:46)
The BoomBustBlog Sovereign Contagion Model
Nearly every MSM analysts roundup attempts to speculate on who may be
next in the contagion. We believe we can provide the road map, and to
date we have been quite accurate. Most analysis looks at gross claims
between countries, which of course can be very illuminating, but also
tends to leave out many salient points and important risks/exposures.
In order to derive more meaningful conclusions about the risk
emanating from the cross border exposures, it is essential to closely
scrutinize the geographical break down of the total exposure as well as
the level of risk surrounding each component. We have therefore
developed a Sovereign Contagion model which aims to quantify the amount
of risk weighted foreign claims and contingent exposure for major
developed countries including major European countries, the US, Japan
and Asia major.
I. Summary of the methodology
- We have followed a bottom-up approach wherein we have first
identified the countries/regions with high financial risk either owing
to rising sovereign risk (ballooning government debt and fiscal deficit)
or structural issues including remnants from the asset bubble
collapse, declining GDP, rising unemployment, current account deficits,
etc. For the purpose of our analysis, we have selected PIIGS, CEE,
Middle East (UAE and Kuwait), China and closely related countries
(Korea and Malaysia), the US and UK as the trigger points of the
financial risk dissemination across the analysed developed countries. - In order to quantify the financial risk emanating in the selected
regions (trigger points), we looked into the probability of the risk
event happening due to three factors – a) government default b) private
sector default c) social unrest. The probabilities for each factor were
arrived on the basis of a number of variables determining the relative
weakness of the country. The aggregate risk event probability for each
country (trigger point) is the average of the risk event probability
due to the three factors. - Foreign claims of the developed countries against the trigger point
countries were taken as the relevant exposure. The
exposures of each developed country were expressed as % of its
respective GDP in order to build a relative scale for inter-country
comparison. - The risk event probability of the trigger point countries was
multiplied by the respective exposure of the developed countries to
arrive at the total risk weighted exposure of each developed country.
- advertisements -
I'm not so sure emergings are just followers, China is investing in future in that they have more developed HS rail, cities etc....and their manufacturing, while still relying heavily on cheap labor, is becoming very advanced in certain sectors. I talked to manufacturing equipment makers in US that said, 5 years ago even when economy in US was still good, that it was always the Chinese that wanted top of line, high-tech equipment, US folks that were buying lower-end stuff or used. Brazil has done things with energy indepence we can only dream about, etc...
I think it will be a mixed bag for many years, and yes we will eventually find new equilibrium (not de-couple but balance differently). But initially, like in next 5-10 years, West crashes, whole world crashes, emerging just has less far to drop. Britain's empire has been declining for 100-200 years, but London is still a finance center. Japan has slowed way down relative to rest of Asia, but Japanese still relatively well-off. US will decline too, but not likely overnight suddenly make all India/China middle class.
It seems to me China basically pulled a Cisco during tech bubble...Cisco lent money to their customers that were not earning a profit, so they could buy Ciscos equipment, with the idea, I guess, these companies would eventually have income to pay loans...China has done same to us...so how well did Cisco do when tech bubble burst...they survived and are still a leader, but they lost a lot of money making products for customers that would never pay for them
REally, Reggie, your title question is one not even worth considering it is so absurd. You might as well have posited "Will General Motors spark an economic rebound?"
Tired about US/Europe pseudo-economists talking "emergings" will save the world from this crisis.
They do not know a thing on the inner mechanics (social and political) on these markets, bottom line: they only exists as a result of 30 years of US credit expansion.
LOL in the face of those believing EM are the salvation on this super cycle contraction, in 10-20 years will be different but now they are not.
All analysis aside, emerging markets will never lead to anything. That is the first thing to understand. They are and will remain following markets. West goes, they crash. Simple as that. We are tightly coupled and pure followers.
India. China. Russia. Brazil.
Now consider this: None of these countries are efficient when it comes to the utilization of or reporting on capital.
All these countries are follower nations in the world of markets and business (maybe ahead on tech in some cases, but never meaningfully).
It's a tired joke for someone who has deeply lived both sides.
ORI
http://aadivaahan.wordpress.com
If you live in a binary world of left and right, good and bad, then perhaps 'followers and leaders' may apply - but that's not reality. As the doomsayers wait around for Armageddon in the US and London, China and Brazil are busy cranking away. What if things in the US just meander? What if lower growth and higher unemployment are the new normal and things just don't blow apart, nor do they rally upwards? Under that scenario, EMs are the only markets where companies have pricing power and growth. Zero sum is what has gotten pretty old. And I say that as someone who lived in LatAm for the greater part of a decade.
The PIIGS claims charts are very interesting and imply that much of the contagion is a European issue. Interesting, though not surprising, that Belgium and the Netherlands are way way over-exposed. The Dutch better win the World Cup because that may be the best it's going to be for a while.......
I think this is actually a weakness in the data presentation. Including the US, Canada, Japan, and Russia to give some comps would make the presentation more balanced and comprehensive. He may actually do this in his retail version, but if not, that might be a potential blind spot.
Global banks are much too interconnected, thus there is really no such thing as just a "European problem". Add in some leverage, opaque accounting and reporting, and a few regulators so far behind the curve as to appear they are on a different race track, and you suddenly have a global problem. If the Asian flu was contagious, the Pan-European flu will be an epidemic.
I sure hope so Reggie....I suspect we're sacrificing our middle class in the US, by shipping manufacturing jobs to China and Mexico, so that their middle class develops into a critical mass creating self-sustaining demand.
and once the workers in those countries become consumers of their own goods, that's means fewer goods being exported, (assuming supply is somewhat limited, as this part of the global economy has been at full capacity) A slowdown in low cost imported goods will further strain American consumers, and American workers, who have migrated from manufacturing to retail jobs. High end goods, where there is still some profit margin, should continue, bringing the spread between high end consumer goods and low end goods closer together, creating a second wave, or backlash against emerging market low end manufacturing. We already see this, at least anecdotally, at the supermarket, where the price between brand names and generics is very tight.
perhaps you are old enough to recall the generic craze during the recession and gas shortage in the 1970's. In some ways this might be the flip side of the inflationary economy. Are we exporting our class income disparity problems to the rest of the world? Once a communist culture, like China comes to grips with the American caste system, a new cultural revolution will arise.