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July 18, 2011 at 11:19 AM
A commentary released Monday by PIMCO asks, “Are emerging markets ready to lead the global economy?” Lupin Rahman, portfolio manager, predicts emerging markets will outperform advanced economies over the next three to five years.
Rahman (left) said in the commentary that growth is expected to average 6%, compared with developed markets’ 2% growth rate. In Latin America and emerging Asia, in particular, growth should be between 6% and 7% with “low leverage, strong structural demand for commodities and a soft landing in China.”
She noted that countries in emerging Europe, especially those with high levels of leverage, can expect growth of 4%.
“The relevance of this increasing importance of EM for investors lies in the remarkable divergence between current investor positioning and the economic realities of the post-crisis world,” Rahman said, adding that global investors are “significantly underweight” emerging markets relative to their share of the world economy.
Rahman pointed to two major shifts in inflation in emerging markets: falling levels of inflation, and decreased volatility. She predicted that the current 2- to 3-percentage-point differential between emerging and developed markets will likely continue.
Most importantly, she said, is that a sharp increase is not likely. “Of course there are risks to this baseline view from potential spikes in commodity prices and asset-market bubbles,” she added, “but the fundamental shifts in inflation expectations mentioned before provide EM policymakers room to maneuver in tackling these shocks.”
