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IMF says European debt crisis a boon for emerging markets

21 April 2010, 21:21 CET
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(WASHINGTON) - Europe's debt crisis is sending investors flocking to the emerging markets of Brazil, China and India, the IMF has said, prompting analysts to ask if the crisis is changing the world economic order.

In a report on the state of the global economy, the International Monetary Fund on Tuesday said the debt crisis in Greece and other eurozone nations had caused investors to look to emerging nations for profit.

"The crisis has altered perceptions about risk and return in mature (markets) relative to emerging markets," the IMF report said.

The global crisis has undoubtedly laid bare the fragile state of government finances in swathes of once-safe Europe, prompting austere spending cuts and questions about the future of the euro itself.

The so-called PIIGS -- Portugal, Italy, Ireland, Greece and Spain -- have seen their public debt soar, leaving jittery investors to worry about previously unthinkable government defaults.

Greece has been worst hit. As efforts by eurozone members to create a safety net have spluttered, investors have demanded greater risk premiums to lend Greece fresh cash, deepening the debt crisis further.

According to the IMF, the impact of that crisis in confidence is now being felt in the choices of everyone from the smallest individual investors to multi-billion-dollar funds.

"The favorable performance of emerging market assets relative to mature market assets has prompted growing interest by global investors in raising their asset allocations to emerging markets and other advanced economies.

"Retail investors and hedge funds are adding to their emerging market portfolios in the near term," the report said.

"Capital is flowing to Asia (excluding Japan) and Latin America, attracted by strong growth prospects, appreciating currencies, and rising asset prices, and pushed by low interest rates in major advanced economies, as risk appetite continues to recover," the IMF said.

Interest in emerging markets is long-standing. But as investors look to ever more exotic "frontier markets" for high returns, investments in countries like Brazil, China and India have become the mainstream.

According to the IMF the trend has been spurred by the sale of emerging market stocks in bundles called exchange-traded funds, or ETFs, which spread risk over several countries and sectors.

The lure of emerging market investments is obvious according to the Vanguard Group, a US-based investment firm that runs emerging and developed market ETFs.

The firm said one widely-used emerging market index shows returns on investment averaging 15 percent in the five years to 2009. Investments in a similar US index gave returns of under one percent.

And in contrast to sclerotic growth rates in Europe and North America, some Asian countries, like China, are forecast to see double-digit growth.

The IMF on Wednesday predicted that advanced economies will grow just over three percent this year, while emerging and developing economies will grow over six percent.

Vanguard cautioned that high growth rates should not be equated with bumper investment returns, but it said emerging market investments are being transformed from an exotic backstop for more traditional investments, to an investment like any other.

"(With the) economic out-performance of emerging economies, some investors are reassessing the primary role of emerging markets in their global portfolio from one of diversifying their equity holdings to one of generating higher expected returns relative to developed markets."

The shift is so great that in a report on Tuesday, ratings agency Standard & Poor's asked if there might now be a "changing of the guard," and whether emerging market countries might "surpass their high income counterparts in creditworthiness?"

S&P concluded there was no changing of the guard just yet, but that poising the question -- unthinkable before the crisis -- may be a sign of how much the world is changing.


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