Emerging market growth: The hiccups on the way

The emerging market growth story is still playing out, but these markets are bound to be affected by cyclical growth patterns like any other economy

Emerging markets are quite popular these days. As the developed world bumps along with 1% or 2% growth and rampant talk of double-dip recessions, emerging markets seem to roar ahead with ever more impressive numbers.

The growth rate in China is always impressive. Lately it has been even more so. It has chalked up its usual double-digit growth. But other BRIC countries are not far behind. India is forecast to grow at 8.5%, continuing its impressive trend of the past few years in the teeth of the worst global recession in almost 80 years. Even better than India is Brazil with a growth rate of 9%. The IMF expects emerging economies as a whole to grow 6.9% this year and 6.8% in 2011, far better than their forecast of 2.3% in 2010 and 2.6% in 2011 for developed countries.

Growth like this attracts investors like bees to the proverbial honey. In one week at the end of July, global emerging markets funds took in $796 million while US money market funds lost $15.3 billion. According to JP Morgan, emerging market bond funds have taken in $50 billion in fresh money surpassing 2009 when they took in $46 billion. They are forecast to break all records by the end of the year with a record inflow of $75 billion. According to Morningstar, the bond rating agency, the second ranked fund for new assets was a global bond fund, Templeton Global Bond. Of course these markets have their adherents. The China Stock Digest, a China-oriented investment letter, crowed that "China has resumed its economic boom in full. It is as if the global economic crisis had never happened." It also quotes none other than former Federal Reserve Chairman Alan Greenspan as saying, "China is the most dynamic capitalist economy in the world." The statement is interesting not for its truth, but for the perspective of someone who helped cause one of the most severe economic disasters in history. The fact that Mr Greenspan thinks things in emerging markets are great should be a tip-off that there are problems brewing. First we should start with deficits. While China is running a surplus of 4%, Germany surpasses it with 5%. The US is famous for its 3% deficit, but India is on course to run a deficit at the same level. Brazil's is a little better with a projected deficit of 2.7%.

The amount of stimulus money sloshing around Western markets may not prevent a double-dip often because it is seeking greener pastures elsewhere. According to the IMF, low interest rates have created a carry trade increasing capital flows to emerging markets that drive up asset prices.

Much has been written about whether China is experiencing a real-estate bubble. Its real-estate market has increased 61% in the last six months alone. But real-estate booms know no boundaries. In Brazil prices are also going wild. In some markets it has increased 100% in the last 14 months. At the start of the recession India's real estate market fell 25%, but has now recovered with a vengeance.

Capital inflows and vibrant economies of course lead to inflation. Indian inflation is already above double digits at 11.6% followed by Turkey at 8.7% and Brazil at 5%. China is supposed to have inflation under control and is thought to be 'tightening'. Still it has to be seen to be believed. Besides real estate, food prices are up. Wholesale corn prices in local markets in China are at record levels and to control prices China is importing the highest amount of grains since crop failures in 1994-1995.

All of these problems are reflected in the various stock markets. From their crash lows the Indian, Brazilian, and Chinese markets made remarkable recoveries. They increased 96%, 53% and 22% respectively. But these fabulous numbers were made a year ago. Since then the picture has not been as bright. From January of 2010, the Indian stock market has increased 4%, but the Brazilian market is off 9% and dynamic China is down 20%, the worst performing market in the world after Greece.

It is not only that these markets are down, they are also, despite the recent press, volatile with more inherent risk. According to Moneylife magazine ( and (, Indian securities markets are "narrow, shallow, illiquid and concentrated in the hands of a few individuals located at a few centres." The Chinese stock market has been described for many years as worse than a casino.

The emerging market "story" is certainly seductive. Vibrant new economies with huge hard working, well trained and inexpensive populations have found the formula for explosive growth. These economies are supposed to have decoupled from more developed economies and will, for the foreseeable future be the source of vast profits available for anyone who believes. Sadly the reality can be much more mundane. They go up and down like everything else.

(The writer is president of Emerging Market Strategies and can be contacted at [email protected] or [email protected]).




7 years ago



7 years ago

How come ppl forget the deficit that will be raked due to the consecutive issuances of Oil Bonds to the govt. backed OMCs ? If we aren't close to the double-digit deficit mark, we certainly are close !

Herd on the street: Wockhardt; Suzlon; Mudra Lifestyle; Shree Ram Mills; Venky's India; UB Holdings; Tide Water

Wockhardt: The stock was rising on rumours of the company selling some property to pay off debt. Wockhardt has several hospitals spread across Mumbai, Navi Mumbai, Goa, Nagpur, Nashik, Rajkot, and Surat. Recently, Sun Pharma put a spanner in its plan to settle its foreign currency convertible bond (FCCB) creditors, by approaching the high court asking to be heard before any settlement was allowed between Wockhardt and its creditors on FCCB dues. Sun demands the original FCCB terms be honoured. Wockhardt had taken most creditors on board to clear a preferential issue of up to $400 million and fresh issue of FCCBs up to $74 million as part of the settlement on bond dues. Sun says it holds close to 20% of the FCCBs that Wockhardt had issued to raise $110 million.

Suzlon: There were rumours of RIL planning to take over Suzlon. After the Vedanta-Cairn deal, it is wise to mention even absurd-sounding rumours about large-cap companies. In its latest quarter, Suzlon reported a 42% fall in consolidated revenues, while losses deepened to Rs9.12 billion from Rs4.5 billion y-o-y. Its European operations caused most of the pain while operations in India, Brazil and China improved.

Mudra Lifestyle: There is a buzz around a stake sale to a Korean company. This was also flashed by CNBC TV18 quoting ‘sources’. Mudra is promoted by Murarilal Agarwal, Ravindra Agarwal and Vishwambharlal Bhoot. It posted a revenue of Rs1.1 billion and profit of Rs25 million in its June quarter (Rs904 million and Rs2 million in June 2009). The stock hit a high of Rs50 in mid-August but has been falling ever since.

Shree Ram Mills: A rumour that was doing the rounds earlier has resurfaced. In June, the buzz was that Shree Ram Urban Infrastructure, the Vikas Kasliwal-run real-estate company, is set to sell a part of its 2.65 million sq ft in Shree Ram Mills in Worli (central Mumbai) for around Rs25 billion. This stock was being touted by many mid-size and small brokers in August.

Venky’s India: There is some buzz of a strategic stake sale to a foreign company. Promoters hold 56% stake in the company. The company was founded by BV Rao and Uttaradevi Rao. The stock has risen from Rs250 in February to current levels of Rs715. In its June quarter, the company posted revenues of Rs2 billion and profit of Rs281 million (Rs1.7 billion and Rs111 million in June 2009). It recently set up a poultry-feed manufacturing facility in the Tay Ninh province of Vietnam with a total investment of Rs1.5 billion.

UB Holdings: Strong rumours of bonus/split in the Vijay Mallya-promoted company. The stock has risen from Rs190 in June to the current Rs270 levels.

Tide Water: Rumours of a big bonus issue have resurfaced. Apparently the announcement will be made in the board meeting on 3rd September. Moneylife had reported this rumour on 9th August. (See:


Index funds getting popular; Birla Sun Life plans to launch Nifty ETF

The fund will closely track the stocks represented in the S&P CNX Nifty; but ETF volumes have remained on the lower side

More and more fund companies are launching passive mutual funds, also called index funds. Among the passive fund products, after launching index funds which are supposed to replicate the underlying index with 'passive' management, fund houses are now trying their hands at Exchange Traded Funds (ETFs). Birla Sun Life Mutual Fund has recently filed a draft offer document with the Securities and Exchange Board of India (SEBI) to launch an open-ended 'Nifty exchange traded fund' (ETF). The fund will closely track the stocks represented in the S&P CNX Nifty.

Over the past decade, around 20 index funds have hit the market. Suddenly in the past few months, we have seen a slew of index fund launches by fund houses. Taurus Mutual Fund launched Taurus Index Fund; IDFC Mutual Fund introduced the passively-managed IDFC Nifty Fund in April 2010 and in May 2010, IDBI Asset Management Company (AMC) launched IDBI Nifty Index Fund. This was followed by ICICI Prudential Mutual Fund which floated a Nifty Junior Index Fund in June.

Unlike index funds, ETFs do not carry an entry or exit load. Just like stocks, ETFs can be bought and sold through the stock exchanges on a real-time basis. ETFs can be cost-effective for investors as they charge a miniscule fund management fee compared to index funds. There has been as much a rush to launch ETFs, as index funds. There are 24 ETFs available in the market. Birla Sun Life Nifty ETF will be the fifth Nifty ETF joining the ranks of four existing ETFs like Kotak Nifty ETF, Nifty BeES, UTI Sunder, Motilal Oswal MOSt Shares M50 ETF, which are all benchmarked against the S&P CNX Nifty. The S&P CNX Nifty constitutes of 50 stocks.

Among the four existing ETFs benchmarked against S&P Nifty, UTI Sunder launched in July 2003 has yielded 26% compounded annual growth rate (CAGR) return since its inception while its benchmark S&P Nifty has posted 24.98% during the same period. Nifty BeES was launched in January 2002 by Benchmark Mutual Fund. The fund has posted an NAV return of 21% since inception while its benchmark climbed 20.77% between the same period. As these two examples prove, ETFs closely track the underlying indices. But not all funds manage funds passively while pretending to. Moneylife had earlier reported on how index funds have deviated from their objective of passive investment. See here: (

Motilal Oswal MOSt Shares M50 ETF is a fundamentally weighted basket based on the S&P CNX Nifty Index and has its own pre-defined methodology with different weights for the same Nifty stocks.

Despite their lower cost, ETFs continue to be unpopular among investors. Only two products - the ETFs launched by Benchmark Mutual Fund (Nifty BeES and Nifty Junior BeES) contribute to 90% of the trading volume. The low trading volumes are reflected in the bid-ask spread too.

According to The  Association  of  Mutual  Funds  in  India (AMFI) data, the assets under management (AUM) of ETFs (including gold ETFs) stood at Rs3,504 crore as on July 2010. During July 2010, ETFs saw net inflows of Rs530 crore.


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