Emerging Markets Super-Cycle Promises Growth: Cutting Research

The emerging-markets juggernaut that propelled the globe out of the 2009 recession is taking a pause rather than running out of steam.

That’s the analysis of economists at Standard Chartered Plc, who have updated their 2010 theory that the world economy is in a “super cycle” of historically high economic growth which lasts a generation. It remains on track, they conclude in a Nov. 6 study.

Such periods are rare. One lasted from 1870 to 1913, between the U.S. Civil War and the run-up to World War I. The second went from 1946, following World War II, to 1973, the economists said. If their estimates are accurate, the world economy will swell by an annual average of 3.5 percent from 2000 to 2030, faster than the 3 percent of the prior three decades.

The outlook was challenged this year as developing economies such as China slowed: The International Monetary Fund forecast they will grow in 2013 at the weakest pace since 2009. The MSCI Emerging Markets Index is down 4 percent this year, versus a 19 percent rise for the broader MSCI World Index.

While they have lowered their growth forecasts for China and India, the Standard Chartered team still expects global expansion to accelerate over the next three years as developing economies implement structural improvements allowing their economies to be more productive.

China will still have average annual growth of 7 percent through 2020 and 5.3 percent between 2021 and 2030, replacing the U.S. as the world’s largest economy by 2022.

That will help lift emerging markets’ share of global gross domestic product to as much as 63 percent by 2030 from 38 percent in 2010. World trade could quadruple to $75 trillion by 2030 from $17.8 trillion last year. The ranks of the middle class will also jump, according to the report.

Financial markets in developing nations will also expand, led by China and India, and the yuan will become a leading world currency, Standard Chartered said.

Threats to the optimism include questions over whether economies are continuing to make structural improvements, the risks posed by aging populations, how fast U.S. interest rates will rise when Asian debt is so high and signs the commodity boom is over and that the model of relying on exports is flawed, the economists said.

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The Federal Reserve’s influence on equity prices has surged three-fold in the past decade as monetary policy increasingly drives financial markets.

In an attempt to quantify the Fed effect, Stephen L. Jen and Fatih Yilmaz of SLJ Macro Partners LLP found the U.S. central bank has been three times more important in determining how stocks trade in the past 10 years than it was from 1980 to 2002. They compared the influence of the Fed’s interest-rate, money-supply and exchange-rate tools against that of inflation, corporate profits and economic growth.

On average, the Fed’s policy stance explains 40 percent of the variations in equity prices, compared with corporate profits, which explain just 15 percent of share swings, London-based Jen and Yilmaz wrote in an Oct. 30 report.

With the Fed delaying its decision to begin tapering its $85 billion of monthly asset purchases, this analysis suggests “buoyant equity prices, artificially low bond yields, but a not-too-weak dollar” for the rest of this year, they said.

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European policy makers could help create 1 million jobs if only they could clear up uncertainty about their actions.

That’s the estimate of Yacine Rouimi at Societe Generale SA, who said in a Nov. 5 report that if policy uncertainty returned to its pre-crisis level, it would be enough to increase GDP growth by 2 percentage points within three years.

Spain and Italy would benefit the most in terms of growth from a return to the environment prior to the debt turmoil, with businesses leading the way by investing more, Rouimi said.

“This should provide a compelling argument for euro area governments to swiftly clarify issues such as the banking union and financial sector regulation,” he said.

In a separate study, published by the central bank of Poland, economists Maciej Albinowski, Pitor Cizkowicz and Andrzej Rzonca said the European Central Bank’s decision to lower its benchmark rate toward zero in recent years could have undermined trust in it.

“Distrust in the ECB during the crisis could partly be a product of an inappropriate cure to the crisis,” they said.

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High-frequency trading is a source of stability, not just volatility.

Using the trading patterns of 120 stocks on the Nasdaq Composite Index from 2008-2009, economists Jonathan Brogaard, Terrence Hendershott and Ryan Riordan found that speed trading can help deliver more efficient prices by pushing markets away from temporary pricing errors even on days where trading is choppy.

High-frequency trading in stocks came under increased regulatory scrutiny after the so-called flash crash in May 2010, during which the Dow Jones Industrial Average briefly lost almost 1,000 points.

The practice involves using powerful technology and complex computer programs to execute orders in milliseconds and profit from fleeting discrepancies in security prices across different trading venues. Companies active in high-frequency trading have warned that interfering with their strategies would raise investor costs and harm financial stability.

The research suggests that high-frequency trading “provides a useful service to markets,” the economists said in the report, published by the ECB. “They reduce the noise component of prices and acquire and trade on different types of information, making prices more efficient.”

Efforts by policy makers to curb the activities without looking to compensate for the benefits they provide could “result in less efficient markets,” the paper said.

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Emerging markets may avoid a financial crisis akin to that witnessed in the late 1990s, when economies from Latin America to Asia were battered, according to economists at Wells Fargo Securities LLC.

The developing world’s foreign debt as a share of GDP has shrunk since 1998 and governments also owe less as a percentage of their economies, Charlotte, North Carolina-based economists Jay H. Bryson and Mackenzie Miller said in an Oct. 28 report.

Excluding China and the economies in the Middle East and North Africa, the current account gap of developing nations stands at about 2 percent of GDP this year, better than the 2.6 percent of 1997. It also takes about 25 percent of the emerging countries’ exports to service their external debt, 10 percentage points lower than in 1997. The net gain in credit extended to private companies in developing nations since the late 1990s can also be entirely explained by China’s rise.

“As long as the underlying economic fundamentals in developing economies remain solid, most of these countries should not have problems servicing their debts, at least not in the foreseeable future,” Bryson and Miller wrote. “In other words, a wave of financial crisis a la 1997-98 does not appear imminent.”

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Every aspect of the international monetary system is malfunctioning, according to its guardian.

In a study published this week, three IMF economists observed how the system of floating currencies is the most volatile since the end of the Bretton Woods system and exchange rates are seldom in line with economic fundamentals.

The free flow of capital has not brought the expected benefits to the world economy and often causes damage, while the intermingling of financial markets has often magnified the effects of crisis and led to contagion, said Rakesh Mohan, Michael Debabrata Patra and Muneesh Kapur.

Even the dollar’s role as the main reserve currency is “increasingly being tested,” although there are few alternatives in sight, the IMF officials said.

Such an environment requires individual countries to stabilize their own economies and markets, with central banks broadening their mandates from managing inflation alone to include market and banking regulation and supervision. Monetary policy makers in advanced nations may also need to better acknowledge the impact their policies have elsewhere, they said.

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