5 Emerging Markets Breathing Fire in 2012

12/23/2011 10:30 am EST

Focus: GLOBAL

Yiannis Mostrous

Editor, The Capitalist Times

As the Year of the Dragon unfolds, these economies are primed for investors in the coming year, observes Yiannis G. Mostrous of Global Investment Strategist.

According to the Chinese zodiac, 2012 is the Year of the Dragon—an auspicious symbol of good fortune and power. After enduring a rollercoaster ride this year, investors will need all the good luck they can get in 2012.

Currently, investors are pessimistic, and there’s not much in the way of excitement when it comes to the stock market. Although such anxiety is understandable and justified, it sets the stage for contrarian calls. In other words, if the majority of investors expect a negative outcome, the markets may surprise by posting strong gains.

That said, the view remains here that the global economy will not enter a recession in 2012, and will post decent economic growth of about 3% to 3.5%. If this proves to be the case, current valuations in emerging markets in general and Asia in particular are starting to look very attractive. The reason being that they are currently pricing in recession, although not a total financial collapse.

Although recession is not our base scenario, it’s a possible outcome, and some indicators—most notably the OECD leading indicator—have already begun to signal a looming recession. On the other hand, other indicators such as China’s purchasing managers index or US capital expenditures suggest that the global economy will experience a soft landing at the very worst.

That’s an important distinction, because the US economy must avert recession if the global economy is to post respectable growth in 2012. With Europe struggling to get its arms around the sovereign-debt crisis, US growth will be critical to the health of the global economy.

On the latter issue, it is interesting to note that some leading indicators for jobs, such as unemployment insurance, have improved. US jobless claims recently dropped below 400,000, reaching 364,000. This is a marked improvement from the 2009 high of 659,000 jobless claims.

If US jobless claims continue to decrease, there’s a strong probability that the US economy can avoid recession, even if some of the stimulus-related programs (such as the payroll tax cut) are terminated at the end of the year.

Given the short-term and long-term challenges facing developed economies, emerging markets look like relative bastions of stability and growth. This is particularly the case for the larger emerging-market economies.

The main developing economies, especially those in Asia, currently boast the fundamentals for solid growth, combined with low levels of sovereign debt. The strength of these economies will eventually be reflected in the performance of their stock markets, especially when investors start allocating more funds toward stocks.

Emerging markets underperformed developed markets this year for two reasons: Europe’s sovereign-debt crisis and concerns over high levels of inflation. In times of distress, investors reduce their allocation to what they perceive as risky assets, and emerging markets suffered as the EU debt crisis battered sentiment and roiled markets—an understandable repercussion of the turmoil on the Continent.

On the other hand, concerns that rising inflation in Asia would derail the global economy proved to be overblown. The most important emerging economies, with the exception of India, have been able to address this issue decisively. This is the reason that emerging markets have performed so strongly since October.

China remains the global barometer on economic growth, and its GDP growth will most likely come in above 9% this year, and around 8% to 8.5% in 2012.

Readers should note that China’s latest Five-Year Plan from 2011 to 2015 calls for annual long-term GDP growth of 7%. Investors should prepare themselves for the possibility of slower growth from China. The Chinese leadership is comfortable with this outcome, so long as it’s achieved with minor disruption to social stability.

Investors that are interested allocating money in emerging markets should look into China, South Korea, Russia, Indonesia, and Taiwan in 2012. The wild card will be India, as the country has found itself in a political stalemate that may drag down growth, as it seems to be delaying further implementation of structural changes on the economic front.

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