Emerging Markets – the bubble again?
The appetite for a piece of pie from emerging markets seems insatiable. Only this year, initial public offerings in the region reached more than $50 billion doubling last year's $25 billion. The soaring demand for assets and a constant capital inflow from overseas have lowered the spreads on developing countries' bonds over U.S. Treasuries to a low of 1.50 percentage points – the lowest since 1997.
What's fuelling this trend? The Herald Tribune writes:
The strongest global expansion in a generation and the ability to borrow at low interest rates in markets like Japan and Switzerland. Those forces are drawing money into economies whose low labor costs and increasingly valuable commodities offer opportunities for higher returns.
Concerns extend well beyond China, which will account for roughly a fifth of the private capital flowing into emerging markets this year. The governor of the central bank, Zhou Xiaochuan, expressed concern on May 6 that a bubble was building in the nation’s stock market, which has already risen more than 80 percent this year.
Sound familiar?
There's more:
In India, where the rupee is near a nine-year high, the price of yellow peas, a staple, has shot up 35 percent in six month. Inflation has exceeded the central bank target of 5 percent since September, even after two and half years of interest rate increases.
Instead of discouraging lending, those rate increases only raise "the possibility of further capital flows," said Venugopal Reddy, the governor of Yaga Reserve Bank of India who introduced lending curbs.
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Cris has raised the alarm on the symptoms of the bubble bust in India. When there are a million shoes produced when there are 1000 people in an economy, then it is a bubble in waiting to be bust,
But in India we have about one billion people of which only about 300 million are consumers the rest are the opportunity. Innovation is bringing products for these large markets. For example small shampoo packets with 25 ml which costs less than a cent, brought shampoo to people in the 600 million group while the super malls sells shampoo in litres to the rest.
The shampoo packet company provides employment to many people. They have graduated from the packet to the litre mode.
What I am trying to convey is this:
In a place where there is no one to consume the infrastructure like road through loans create bubble and not in places like China and India where there are a billion acquiring the empowerment to consume.
So in my opinion it is not a bubble.
Now coming to the question of the interest rates and inflation, some of the causes are :
1. The interventions in the flow of the capital. In India there are still restrictions on the reverse flow of the foreign exchange and there are many approvals required. Individuals cannot take out more than 10,000 USD without approvals. This also creates barriers to the re-deployment of the capital in other countries.
2. Lack of gap between the reciprocity of investment. This has been realised recently.
For example when the Tatas bought Corus there was an outflow of about 20 billion USD.
When Vodofone bought Hutch there was an immediate return of the 20 billion back into the economy.
Investments affect the money supply. The planning mechanism in India is more used to the model of Africa lending than leveraging the markets for the investment balance. It is a matter of time when Indian government learns to use the market for the investment balance.
3. Moreover as mentioned when the 600 million people are empowered there will be a demand bust, no small supply chain can handle it. That’s why today if some one starts a Mac with a different spelling it would also thrive!!!! Hence it is obvious the demand drives the price. This is an great opportunity for the institutions like the bank to move from the social products to the infrastructure products
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The Author Dr.P.James Daniel Paul is the Regional Head of European Union, Investment Facilitation Desk in the Southern Region. Earlier he has been the Senior Trade and Investment Adviser in British Deputy High Commission, Economist at Murugappa Group, Confederation of Indian Industries (Southern Region) and NIPFP (under the finance ministry). He has also taught in Management schools and IT Institutes. He has also been a consultant to the World Bank on two major Health projects and UK corporate on various projects. He has authored many research articles, books and presentations including one at University of California, Los Angles. He has guided many researchers in their postgraduate, M.Phil and Ph.D thesis.
Posted by: Dr James Daniel Paul | May 31, 2007 1:18:34 AM
IHT says “The appetite for a piece of pie from emerging markets seems insatiable. Only this year, initial public offerings in the region reached more than $50 billion doubling last year's $25 billion. The soaring demand for assets and a constant capital inflow from overseas have lowered the spreads on developing countries' bonds over U.S. Treasuries to a low of 1.50 percentage points – the lowest since 1997.” and they titled it “Emerging Markets – the bubble again?”
A quite different read is that the “soaring demand for assets and a constant capital inflow from overseas in search of U.S. Treasuries, have not been able to lower their rates as much as expected because of growing concerns with the dollar. If this is so, the IHT article should have been just titled “The bubble again”
The world has over the last decade been busy hiding the risks through derivatives and hedge-funds so well, that no one really knows now where those risks are. In my mind what we are living is the “Bubble of Blissful Ignorance” and that started when the bank regulators in Basle (probably soviet central planning refugees) decided they were going to drive out the risks of banking from the banks.
Posted by: Per Kurowski | Jun 1, 2007 11:46:05 AM
I do agree with Per Kurowski, that the Hedge funds mask the risks in an ecocnomy. But if the Hedgefunds are regulated then they are mutual funds!!
The hedge funds thrive only in emerging markets where there is regulation and growth.
There could be associations for the hedgefunds. These associations may have an annual fund management target from the federal reserve??
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jamespdaniel@gmail.com
Posted by: Dr James Daniel Paul | Jun 2, 2007 8:50:59 AM
It needs to be corrected that when Vodafone (UK) bought Hutch's (HK) Indian Assets, there was little or no inflow to the Indian Economy as the Indian Promoters did not sell their stake and thus the payment was from UK to HK, India was no were in the picture, even Tax issues are presently under litigation.
Posted by: Mahesh | Jun 14, 2007 10:45:23 AM
Thanks Mr Magesh for the clarification. It can motivate India for further investments abroad or subsidising the Indian investments abroad.
Posted by: Dr James Daniel Paul | Jun 15, 2007 2:21:01 AM