India, China growth help emerging mkts outperform developed peers

Written by Sajan C Kumar | Chennai | Updated: Sep 23 2009, 04:22am hrs
Emerging market economies have outperformed developed economies in 2009, owing largely to the continued high growth (and market size) of India and China. Emerging market economies would have contract this year but for these two countries, although, with the exception of Eastern Europe, they would still have fared less despairingly than developed economies, according a report by UK Trade & Investment (UKTI) and Economist Intelligence Unit.

The relatively strong performance of China and India might suggest a degree of independence from Western economic performance. However, the GDP growth gap between developed and emerging markets in recent years has remained at 5-6 percentage points, indicating a continuing linkage. Much of the emerging market performance in 2009 is, of course, due to the continued high growth rate of China and India . This is the reason why average emerging market growth will remain positive, says the report adding, China , India and other Asian destinations are heavily favoured investment locations over the next five years (45% of respondents cited China, 43 % India and 35 % other Asian nations).

Companies are also divided over the extent to which recovery in their emerging markets business depends on improving conditions in Western markets; just under half (47 %) said it was to a limited extent, and 42% said it was to a great extent. China , India and other Asian markets are the preferred investment destinations for the next five years. In comparison with a similar market ranking by UKTI in 2008, Asian markets now dominate the top-ten list of non-BRIC future investment destinations to the detriment of markets in Eastern Europe , says the report.

The report also seeks to examine opportunities within emerging markets in the context of the current economic climate. Many companies have felt the adverse effects of the global recession, which, coupled with the poor performance of the developed world, has increased the urgency for companies to seek new markets in the emerging world. Almost 90% of the surveyed companies said the global downturn has had an adverse impact on their business, but emerging markets seem to support global profitability. Among companies headquartered in developed countries that derive more than 5% of their revenues from emerging markets, 40% said their financial performance was better than that of their peers. By contrast, of those reporting less than 5% of their revenues from emerging markets, only 24% reported their financial performance as being better than that of their peers.

According to the report, foreign direct investment (FDI) into emerging markets withstood the global economic downturn in 2008, but plummeted in the first quarter of 2009 by 37% year on year. The sharpest decline was seen in Eastern Europe . But the dip in FDI will have more of an impact on developed markets in 2009; inflows are forecast to dip (temporarily) below those to emerging markets. Even if emerging markets as a whole are not delivering the returns they once did, financial performance of companies appears to be related to the extent of their involvement in emerging markets.

The survey findings provide evidence that companies with sizeable emerging market operations tend to be more profitable than those with little or no operations in the emerging world. For those companies that derived more than 5% of their revenues from emerging markets, the share reporting better financial performance than that of their peers was 39%. By contrast, among the companies that derived less than 5% of their total revenues from emerging markets, only 28% reported their financial performance as being better than that of their peers.

Though corporate responses to the crisis differ depending on sector and location, most companies continue to face an array of state and market-related obstacles. Many of these existed during the boom times, and will persist in the upturn. Some have inevitably intensified, such as the lack of credit availability and rising credit risk among suppliers and customers, but this is largely a consequence of the current lending environment, and is expected to improve as economies return to growth. The global economy is expected to recover in 2010-11, although the upturn will, initially at least, be relatively weak and fragile, especially in the developed world. The subdued global outlook reflects the need for massive balance-sheet adjustment in many economies and limited scope.

The survey results also reflect a cautious optimism about the near-term prospects for the global economy. A vast majority of companies (77 %) expect the prospects for the global economy to improve in 2010-11 (far more than the 44% in UKTIs 2008 survey), but only a small minority (15%) of the survey respondents expect a significant improvement (compared with only 9% in 2008). When asked about prospects for their key sectors, 23% of companies said they expected a significant improvement and 55% a slight improvement in 2010-11. This is roughly in line with how respondents saw their own prospects.

According to the survey, there is a somewhat greater optimism about the recovery prospects for emerging markets. The vast majority of surveyed executives expected positive growth in their emerging markets businesses in 2010-11, as was the case in 2006-08, albeit more modest: whereas 25% of the companies reported that they enjoyed an annual average growth in sales of more than 25% in their main emerging market locations in 2006-08.