By Kofi AHOVI
The global financial crisis of 2008 marked the end of the “historically perverse” financial flows from the emerging markets to the developed markets, says Standard Bank.
It adds: “As an increasingly important part of the emerging market universe Africa’s markets are set to outperform those in G4. It is a trend that will continue throughout 2011.”
In its regular report, the “African Markets Revealed,” the bank examines international and local factors that drive markets in 19 African economies, stretching across the continent from Egypt to South Africa.
Reviewing the prospects for the continent as a whole, Stephen Bailey-Smith, Standard Bank’s Head of African Research, said that Africa would benefit from expected global growth, despite the risks posed to this by deleveraging of the US consumer market, funding problems in European countries and the tightening of monetary policy in China.
African markets were facing exciting times, said Bailey-Smith, adding that “Emerging markets are in a strong position to increasingly contribute to global growth, while developed market policy makers have shown their determination to make the necessary deleveraging process in their countries as smooth as possible.”
“Emerging market growth outperformance will attract investment. This will see ‘frontier markets’ becoming economically stronger and reducing the gap existing between them and the broader, more established, emerging market economies,” he said.
He explained that the increase in the fortunes of the frontier markets would be fed by declining returns on assets across developed and more mature emerging market economies, saying that “As this occurs investment flows will look down the risk curve towards frontier markets, including those in Africa. “
“The further we get from the nervousness of the 2008 financial crisis, the more willing investors will be to take on less liquid assets, which have tempered post-crisis investment flows into Africa. It can be expected that frontier markets will outperform relative to developed markets and the more established emerging markets,” said Bailey-Smith.
“In line with this it can be expected that currencies of emerging markets will continue to outperform G4 currencies. The USD depreciated by about 1.1% against other developed market currencies during 2010, but by about 3.6% against a trade-weighted basket of emerging market currencies.”
“The level of USD weakness has been consistent since January 2009, but the movement in emerging markets has been less volatile and relatively consistent to the weakness against developed market currencies, particularly the Euro,” said Bailey-Smith.
It could be expected that there would be continued volatility on the EUR/USD cross, with concern over the Eurozone debt crisis likely to place more downward pressure on the EUR/USD, with a move back towards 1.10 or even parity likely over the next six to 12 months.
Turning to commodities, the report said that commodity prices could be expected to increase. While G4 interest rates remained extremely low, the high-beta commodities such as oil, gold and copper would continue to trade more like currencies, but, importantly, currencies that cannot be printed. Oil prices would continue to rise, trading above USD 100/bbl in 2011, averaging about USD 92/bbl, with price volatility declining when compared to that experienced in recent years.
“Such a scenario is clearly positive for oil producers across Africa, while the additional inflation pressures should not be too onerous,” said Bailey-Smith.” That said we are a little concerned by the potential for some commodity-led inflation pressure via food prices. This could foster supply-side inflation pressure globally, more so in economies where food is still a large portion of consumption,” it noted.
Discussing the overall outlook for emerging market outperformance, Bailey-Smith said that the global financial crisis of 2008 was a significant turning point in the organisation of the international economic system and that Africa was a major beneficiary of the change.
“The financial crisis marked the end of the historically perverse financial flows for emerging markets to developed markets, which fostered higher than sustainable growth and eventually the crisis of over-leverage in developed markets. Deleveraging in developed markets means slower growth and a sustained reversal of financial flows. The result will be a sharp outperformance in terms of emerging market growth, currencies, stocks, bonds and credit.”
In its latest World Economic Outlook, the IMF predicted that growth in emerging markets in 2011 would be 6.4%, with growth continuing at an average rate of about 6.4 % year-on-year, for the next five years.
By contrast, the IMF was expecting developed markets to grow only about 2.4% year-on-year for the next five years. . Average global growth would be 4.4% on a year-on-year basis.
“Emerging markets accounted for 32.7% of current global GDP (in USD terms) in 2009, an increase of 12, 7% since 2000. This proportion will increase to 38.7% in 2015. So while emerging markets account for less than a third of global GDP, they are expected to produce around half of global GDP growth.
“If these expectations are extrapolated forward, emerging market economies will be larger than those of developed markets by about 2028. Africa and its growing markets will be major beneficiaries of these changes,” he concluded.
The global financial crisis of 2008 marked the end of the “historically perverse” financial flows from the emerging markets to the developed markets, says Standard Bank.
It adds: “As an increasingly important part of the emerging market universe Africa’s markets are set to outperform those in G4. It is a trend that will continue throughout 2011.”
In its regular report, the “African Markets Revealed,” the bank examines international and local factors that drive markets in 19 African economies, stretching across the continent from Egypt to South Africa.
Reviewing the prospects for the continent as a whole, Stephen Bailey-Smith, Standard Bank’s Head of African Research, said that Africa would benefit from expected global growth, despite the risks posed to this by deleveraging of the US consumer market, funding problems in European countries and the tightening of monetary policy in China.
African markets were facing exciting times, said Bailey-Smith, adding that “Emerging markets are in a strong position to increasingly contribute to global growth, while developed market policy makers have shown their determination to make the necessary deleveraging process in their countries as smooth as possible.”
“Emerging market growth outperformance will attract investment. This will see ‘frontier markets’ becoming economically stronger and reducing the gap existing between them and the broader, more established, emerging market economies,” he said.
He explained that the increase in the fortunes of the frontier markets would be fed by declining returns on assets across developed and more mature emerging market economies, saying that “As this occurs investment flows will look down the risk curve towards frontier markets, including those in Africa. “
“The further we get from the nervousness of the 2008 financial crisis, the more willing investors will be to take on less liquid assets, which have tempered post-crisis investment flows into Africa. It can be expected that frontier markets will outperform relative to developed markets and the more established emerging markets,” said Bailey-Smith.
“In line with this it can be expected that currencies of emerging markets will continue to outperform G4 currencies. The USD depreciated by about 1.1% against other developed market currencies during 2010, but by about 3.6% against a trade-weighted basket of emerging market currencies.”
“The level of USD weakness has been consistent since January 2009, but the movement in emerging markets has been less volatile and relatively consistent to the weakness against developed market currencies, particularly the Euro,” said Bailey-Smith.
It could be expected that there would be continued volatility on the EUR/USD cross, with concern over the Eurozone debt crisis likely to place more downward pressure on the EUR/USD, with a move back towards 1.10 or even parity likely over the next six to 12 months.
Turning to commodities, the report said that commodity prices could be expected to increase. While G4 interest rates remained extremely low, the high-beta commodities such as oil, gold and copper would continue to trade more like currencies, but, importantly, currencies that cannot be printed. Oil prices would continue to rise, trading above USD 100/bbl in 2011, averaging about USD 92/bbl, with price volatility declining when compared to that experienced in recent years.
“Such a scenario is clearly positive for oil producers across Africa, while the additional inflation pressures should not be too onerous,” said Bailey-Smith.” That said we are a little concerned by the potential for some commodity-led inflation pressure via food prices. This could foster supply-side inflation pressure globally, more so in economies where food is still a large portion of consumption,” it noted.
Discussing the overall outlook for emerging market outperformance, Bailey-Smith said that the global financial crisis of 2008 was a significant turning point in the organisation of the international economic system and that Africa was a major beneficiary of the change.
“The financial crisis marked the end of the historically perverse financial flows for emerging markets to developed markets, which fostered higher than sustainable growth and eventually the crisis of over-leverage in developed markets. Deleveraging in developed markets means slower growth and a sustained reversal of financial flows. The result will be a sharp outperformance in terms of emerging market growth, currencies, stocks, bonds and credit.”
In its latest World Economic Outlook, the IMF predicted that growth in emerging markets in 2011 would be 6.4%, with growth continuing at an average rate of about 6.4 % year-on-year, for the next five years.
By contrast, the IMF was expecting developed markets to grow only about 2.4% year-on-year for the next five years. . Average global growth would be 4.4% on a year-on-year basis.
“Emerging markets accounted for 32.7% of current global GDP (in USD terms) in 2009, an increase of 12, 7% since 2000. This proportion will increase to 38.7% in 2015. So while emerging markets account for less than a third of global GDP, they are expected to produce around half of global GDP growth.
“If these expectations are extrapolated forward, emerging market economies will be larger than those of developed markets by about 2028. Africa and its growing markets will be major beneficiaries of these changes,” he concluded.
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