Power shift in perspective

Paul Murphy

Anyone from the Middle Eastern financial community who happened to be in the Suite G conference room at the Boston Marriott hotel early last week will no doubt have felt a flush of pride. On stage at a key session of the CFA Intitute's 2010 conference – the leading annual get together of the global financial analysis community – a gentleman called Antoine Van Agtmael was speaking. The room was packed and the audience was attentive, since this was the man who actually coined the phrase "emerging markets".

Speaking to five or six hundred hardcore market professionals, van Agtmael was running through themes that, to him at least, are now quite familiar. The world is changing in a more profound way than many in the developed "West" seem to acknowledge. To Van Agtmael, for example, it was hugely significant that if we look back to the events of September 2007, in the wake of the Lehman collapse, just as US Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke were begging Congress for bailout funds on the other side of the world Chinese officials were celebrating China's spacewalk. A shift in economic power has already taken place and the trend is accelerating in the wake of the credit crisis, not declining. As chairman and chief executive of his own investment fund, Emerging Markets Management, Van Agtmael ran through an argument that says that at the root of the current financial crisis is a loss of competitiveness in the West: For decades, the US (and the rest of the 'developed world') "have been over-consuming, over-leveraging, under-investing, and under-saving… while emerging markets have been under-consuming and investing in their infrastructure."

For Van Agtmael, the news headlines have it all wrong: this is not a "global" financial crisis at all, but a "half-global" crisis instead. Yes, emerging economies saw a severe impact on global trade because of the evaporation of trade finance in the wake of Lehman's demise, but it was temporary and there were no bank failures in the emerging world. Companies in emerging markets were able to stop producing before developed nations stopped consuming, therefore enabling them to limit the damage and recover earlier. In short, those in the developing world were fleeter of foot than those in the West.

So, van Agtmael declared in Boston, this "half global" crisis was a "defining moment for emerging markets… it accelerated their rise and shifted risks for investors." Emerging countries, of course, have benefited by having huge foreign exchange cushions available when trouble hit – that and the fact that emerging countries tend to have relatively low consumption levels and high personal savings rates meant a "credit" crisis was always gong to be less painful. But it is also important to note that as the crisis spread through the world local governments beyond the West had clear domestic credibility, they had the ability to support their own banks if necessary and they had the room to increase fiscal stimulus – again, if necessary. The result? Well, emerging countries are now put at 32 per cent of the global economy, compared with just 25 per cent back in 2007. That's why we have seen stock markets in the emerging world roaring forwards: everyone talks about the great rally on Wall Street that took hold through the spring and summer months in the US last year, yet the gains seen across dozens of developing market bourses have been no less impressive.

Yet comparing and contrasting the relative performance from an investor's perspective between the West and the emerging world is a little trickier than it really should be. As Van Agtmael pointed out in his CFA Institute address, emerging markets did not "submerge" during the crisis. In fact, events accelerated rather than stopped the rise of the Brics (Brazil, Russia, India and China) and other emerging nations, leading Van Agtmael to declare: "Emerging markets are no longer an 'opportunistic' [investment] but a permanent asset class."

Which brings us to a rather troubling anomaly. MSCI, the dominant global provider of index benchmarks for equities around the world, allocates just a 13 per cent weighting to "emerging markets" in its calculations of equities globally.

Is that right? Van Agtmael thinks not and points out a series of factors that the MSCI people seem to be ignoring.

Firstly, in building their indices MSCI statisticians decide what proportion of a particular stock market is "investable." For emerging markets as a whole this is put at 34 per cent versus 84 per cent in developed markets. But Van Agtmael argues that this is wrong, since emerging markets are constantly growing through privatisations and IPOs, while in the West large blocks of shares are often tied up in long-term institutional hands and really should not be classed as "free float". He also points out that investors can now easily place their money in areas MSCI deems to be "excluded" by using exchange traded funds and foreign investor allocations – China A shares being a good example.

There's one other important anomaly here – which brings us to why any Middle Eastern investor sitting in the CFI Institute audience in Boston last week would have had good reason to be proud.

A Van Agtmael powerpoint slide on the speakers' stage declared simply: "Middle East is 'forgotten' but has sizeable markets." He didn't just leave it there. The father of the "emerging markets story" believes the markets of the Arabia offer some of the best value opportunities anywhere – and why companies listed in Riyadh, Dubai and elsewhere are not given greater "bloc" investment status simply baffles him. The Middle East is punching way above its MSCI weight.

In fact, compared with a level of just four per cent back in 2000, on van Agtmael's figures emerging markets are actually 28 per cent of full global market capitalisation, rather than the 13 per cent stipulated by MSCI. That's some anomaly and a very visible shift in world economic power.

The writer is associate editor of the Financial Times


Print Email