Wednesday, 30 September 2009

McKinsey Says Emerging Equity Markets Will Grow Faster

A few weeks ago, I noted research results which concluded that there is no automatic, direct relationship between GDP growth and equity market performance, and I cautioned against jumping too fast into investments in China, India and Russia.

Now along comes global consulting firm McKinsey & Company with its annual Global Capital Markets review (summary here with link to full report, which is free upon registration) with the view that Emerging country Equity Markets will grow considerably faster than major developed markets like the USA, the UK, Eurozone and Japan (Canada is too insignificant to merit much of McKinsey's ink). Notable quote: "... asset classes in mature markets are likely to grow more slowly, more in line with GDP, while government debt will rise sharply. An increasing share of global asset growth will occur in emerging markets, where GDP is rising faster and all asset classes have abundant room to expand." Equity is one of the asset classes they discuss.

McKinsey cites several reasons for thinking that equity in emerging markets will do better:
  • high savings rates in those countries mean a lot of money is available to invest and equity is better placed than debt to be the investment vehicle
  • these countries have great needs for infrastructure construction
  • financial markets in emerging countries are still quite small compared to GDP and thus have much room for growth
  • many state-owned enterprises have yet to be privatized
Along with the big constraint of the government and private debt burden in developed economies, McKinsey see higher inflation as a risk. They see little hope of big gains in equities: "These projections give little support to the hope that corporate earnings and valuations will rise again to significantly and sustainably higher levels in mature markets ."

It seems that McKinsey may not be alone in coming to such conclusions. The rebound in Emerging Markets has been much stronger since January 1st, as the iShares' Emerging Markets Index Fund (EEM) has outstripped such developed market ETF indexers such as SPY (S&P500), VGK (Europe) and XIC (Canada) in the Google Finance chart below.

Admittedly, Emerging Markets did fall off much more drastically during the crisis last fall but they have still outdone the developed ETFs from just before the worst moments of the crash, between August 1st last year and today, as this second Google chart shows.

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