Here is a piece by Steve Williams of Cormorant Capital Strategies. Steve helps me with the investment committee and provides invaluable impartial and independent external expertise.

When the clouds are seen

The October edition of the International Monetary Fund’s (IMF) World Economic Outlook reveals an expectation for global growth to amount to 3.3% in 2014 and 3.8% in 2015. That compares with growth in the Emerging Market and Developing Economies which is expected to reach 4.4% and 5.0% respectively.

If the IMF are right, the remainder of the year will see the fastest pace of expansion, among the emerging market economies, in Asia (6.5%). Asian growth will eclipse that in Emerging and Developing Europe (2.7%), Latin America (1.3%) and the Middle East (2.7%). Only Sub Saharan Africa (with output expanding at 5.1%) will see growth at anything like the pace set by Asia. Asia’s charge into the lead is boosted, in part, by an improved outlook for India… cloudatlasposter

‘In India, growth is expected to increase in the rest of 2014 and 2015, as exports and investment continue to pick up and more than offset the effect of an unfavorable

[sic] monsoon on agricultural growth earlier in the year.’
I’m a little less certain that India can prevail in the next few years – high levels of corruption and stalled infrastructure improvements represent formidable barriers. But there are good reasons to be optimistic.

Foremost among them is the incumbency of the impressive Mr Raghuram Rajan as Governor of the Reserve Bank of India. Presenting him with the award for Best Central Bank Governor of 2014, Euromoney explained that ‘his tough monetary medicine combatted the storm ravaging the deficit-ridden economy in the recent emerging market crisis’. Indeed, I suspect the Indian central bank’s performance during the ‘taper tantrum’ did much to deflate fears that were apparent well beyond the boundaries of the sub-continent.

In addition, assuming that slowing global growth keeps a lid on commodity prices, India’s high rate of inflation will slow without the need for tighter monetary policy thereby affording India’s central bank the opportunity to underwrite faster growth. In any case investors in the emerging markets must be cognisant of the risks they face.

Most notable among them is the threat from a reversal of the flow of cheap capital that these economies have enjoyed in the last few years as central banks in the West supported liquidity. Just such a reversal is already underway. Beginning in May last year – when Ben Bernanke, then Chairman of the Federal Reserve, first mooted some tapering in the pace of its stimulus package – the MSCI Emerging Market index has underperformed the MSCI World Index by 10% having shed and then regained close to a fifth of its value along the way.

Steve Williams