Investment Adventures in Emerging Markets

Readers’ Questions Answered Part VIII

It’s been a while since I answered some readers’ questions. Thank you, readers, for all your responses to the blog—they have been highly encouraging.

Do you think there will be a recession globally or in emerging markets from a mid- to
long-term perspective?

– Asli, Turkey

From a mid- to long-term perspective I believe the global economic situation continues to look very good for a number of reasons. First of all, many emerging markets have continued to grow at a rapid pace and we don’t expect growth to slow down too much over the next decade, although the percentage changes can naturally decelerate when the GDP numbers get bigger. 

Second, we believe the situation in Europe can be worked out and there will likely be considerable reform in European countries such as cuts in government spending and measures taken to stimulate business by lowering taxes and reducing bureaucratic burdens. We expect the same could happen in the U.S. and Japan, as those countries and the entire developed world are learning that one way to stimulate growth is to allow business and private enterprise to grow, particularly the small and medium size businesses. Although the move to these policies will likely take some time, we already see the signs of potential change.

What is the impact if one or more countries withdrew from the euro?

– Shiv, India

France and Germany have repeatedly stated their commitment to keeping the euro, and we believe the likelihood that any other countries will consider withdrawing from the euro to be very low. Even if one or two or more withdrew, it should not impact the viability of the euro as a currency and that currency should continue to be used, in our view.

We must remember that the euro is probably the most important currency change that has taken place in the last century. It has been a resounding success, even though some British commentators and economists had condemned it when it was first launched in 1999 and are condemning it now. Having a common European currency initially brought down the borrowing costs for several countries while making key countries’ exports more competitive by increasing the flow of intra-regional trade and resources. Slovakia is a positive example: it made use of the euro to restructure its economy and its 4% GDP growth in 2010 was one of the highest in the EU.[1] The reality is that the euro has now become an alternative to the USD and has continued to grow in use around the world.

 What is your view on Ukraine? 

– Vitaly, Ukraine 

Ukraine is one of the more interesting markets since it has a number of viable industries with growth potential. Most importantly, we refer to it as a “bread basket” given its rich agricultural industry. Many Eastern European countries have been suffering from the broader global market sell-off due to their proximity to debt-ridden Western Europe, which sees investors generally reducing their holdings and repatriating capital. Despite the current volatility, we believe Ukraine, which is rich in both hard and soft commodities, has potential resulting from what has been the long-term rising demand for natural resources. 


[1] Source: IMF, WEO, as of Sep 2011.

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