The afternoon panels at the Milken Global Conference kicked off with a discussion on emerging markets – for me, at least. Titled “Emerging Markets: Are They Ready for Steadier Performance?,” the session featured Jim McCaughan, CEO of Principal Global Investors, as one of four notable panelists. Through prepared comments and attendee questions, the discussion covered emerging markets from Latin America and Eastern Europe to China and emerging Asia. Jim began his prepared remarks by putting forth an opinion I’ve heard him give elsewhere: investing in emerging markets requires a dual focus. In the long-term, he still feels that growth in emerging markets and a rising middle class mean that emerging markets will outpace developed markets. In the shorter term though, Jim’s outlook is more cautious and, several times in the course of the discussion, he emphasized that short-term volatility could be an issue for investors.
China then took center stage, and the conversation turned toward how that nation will grow in the future. As I’d heard in panels earlier in the day, China is in the process of shifting from an economy based on exporting towards one based on domestic consumption. Jim was pessimistic about China’s ability to reach their stated goal of 7% GDP growth. In fact, Jim said didn’t think China would hit 7%, even if they claimed to. Mirroring his thoughts on emerging markets overall, Jim advised the audience to expect a rough ride in the short term, even if the longer term would be more benign.
The linkages between China and other emerging markets then became apparent when the panel began to examine Latin America. China has been a consumer of commodities on a massive scale. And to a great extent, the providers of those commodities have been other emerging markets. This relationship has been tremendously beneficial to both sides. However, with China slowing, the effects are being felt across emerging markets. Jim offered that the tailwind that Latin American economies had seen from commodity exports to China would now become a head wind. That said, he was quick to add that infrastructure improvement and urbanization trends (similar to what China’s been doing) could still be a force for significant growth in Latin American emerging markets.
Towards the end of the hour, the panel considered what it was to be a “successful” emerging market. The consensus seemed to be this: are they taking the steps to get their populations into a state where they can become consumers? This is what developed markets have. This is what China is trying to create. And that’s an area where Brazil is making great strides, but others, like Venezuela and Argentina, are not. This really brought home for me the idea that emerging markets are not an end state; it’s not the goal. Emerging markets are on a mission to become developed economies, and the extent to which they’ll succeed really depends on the steps they’re taking now.
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