Investing when BRICS converge with the developed world

The developed world is growing as emerging economies grow stronger and faster – and build stronger balance sheets – compared to more developed countries.

Soon, emerging economies are going to converge on developed countries – so fund managers at investment house PIMCO have looked at the challenges and risks for investors.

The firm expects emerging economies to keep on growing for the next three to five years to a level that will overtake or rival many of their developed competitors.

‘We expect them to outgrow the US and Europe as the emerging economies grow at a rate of 5% over the next few years, compared with the 1% growth rate we expect for developed economies,” said fund adviser Michael Gomez.

“This should translate in to a larger market share of the global market for emerging economies, until they account for 50% of global GDP over the next few years.”

The reality is emerging economies are no longer the little cousins of the developed world, but will become full partners in their own right.

Worries of eurozone breaking up

Russia, India, China and Brazil will become vast new markets as their population earn more and demand more to buy.

PIMCO has predicted the likely future for each of the four:

  • Growth in Brazil will taper as global demand weakens and internal demand grows to take up the slack
  • Russia has huge foreign currency reserves and a rouble that is not tied to the US dollar or euro, giving Moscow financial flexibility
  • India needs to look inwards and to establish an internal structure to effectively manage the economy
  • China needs to shift from reliance on exports to feeding internal demand

The worry for each country is what happens in the eurozone – in terms of how Europe finds an orderly solution to economic growth problems and servicing debt.

“Emerging economies entered this period of global uncertainty with relatively clean balance sheets, reasonably high degrees of political flexibility and substantial foreign currency reserves,” said Lupin Rahman.

Higher yields and more compelling returns

“Emerging economies with the closest ties to Europe are likely to suffer the worst, but we would expect  a disorderly fragmentation of the eurozone to negatively affect their growth outlook.”

PIMCO’s advice to investors is the global economy will continue to rebalance, with the developed world saving more money while the emerging world consumes more goods and services.

“We see Asian currencies at the centre of this trend, led by the internationalisation of the Chinese renminbi.,” said Rahman.

“Emerging market investments in many cases may not only offer better fundamentals, but prospects for higher yields and more compelling total returns than traditional developed world alternatives.”

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