Transcript
There are clear signs that emerging market growth is opening the gap with developed markets once again, but this time led by India, a few countries in Southeast Asia, and Brazil – but not China.
At the start of the year, we were looking for lower interest rates to be a real driver for emerging markets, particularly those countries with high real rates, and really where inflation was no longer an issue. This should still be a positive trend as the Fed begins its rate-cutting cycle. But the waters have been muddied by a few central banks taking a particularly hawkish stance, such as Indonesia and Brazil.
One key difference in this cycle is that we don’t expect this heightened growth to result in higher commodity prices. In fact, we expect the reverse. So why do we say that?
The first reason is China’s vast industrial complex, which was built to build countless, millions of apartments and the infrastructure to go with it, is now operating at a fraction of its capacity. And not surprisingly, venting its excesses on the world. Note the pain and the global steel and auto industries to name a few.
Add to this, the rapid transformation of the energy supply. Add to this, the rapid transformation of the global energy supply. the second reason is the removal of those COVID induced global monetary excesses by central banks across the world. Note how all those shortages we were worried about a couple years ago in gas, lithium, nickel, wheat, to name a few, have suddenly become significant excesses.
Only the cartelised world of oil remains holding up, but actually there are cracks appearing there as well.
So, who benefits from all this? Well, without sounding like a broken record, of course, its India. But not just India. Many other emerging markets are energy importers in sunny parts of the world that are very well suited for localised solar power supplied by ever cheaper Chinese goods. Look at how quickly South Africa has turned around a dire power situation just by letting the private sector loose on solar panels. India, too, will never have to build the kind of coal infrastructure that China did during its development phase.
This not only benefits countries like India by improving their external accounts but it also helps the consumers as lower food and fuel prices feed into their improved incomes and improved real incomes. So potentially, that means growth can continue at a higher rate, and finally, we might see some persistent outperformance from emerging markets.
Needless to say, this is something that the Aubrey Emerging Markets Fund is perfectly positioned for.
Disclaimer
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