I want to ask all my readers to please take a moment to honor of the victims of the shooting in Connecticut and keep them in your thoughts. Thank you.
Now back to business. Smoky backroom deals are being crafted fast and furious now! It is becoming far more certain that the fiscal cliff will be avoided and we will start 2013 on a positive note. The latest deals from both the Republican and Democrat sides seem to now hinge on scale rather than principles. It is now down to a question of at what level will the tax hikes get implemented and what spending and entitlements will President Barack Obama agree to cut. So a deal will now get struck right at the brink, as most of us had suspected all along.
If that were to happen, where do we go from there?
Global growth will begin to rise and we may see forecasts of 3.3 percent in 2013 and 4.1 percent in 2014. But if Europe still struggles as it ramps up and the United States grows, but with an overhang of large-scale unemployment and uncertain tax reforms, where will we see the growth? If you said emerging markets, give yourself a pat on the back.
Emerging market equities are typically procyclical and tend to perform strongly when the global economy is expanding. Analysis of how emerging market equities behave through the different phases of the global business cycle confirms this general observation: I find that expected equity returns rise sharply following a move into expansion. Therefore, emerging market equities could provide good exposure to a potential cyclical upswing in 2013.
At the country level, Russia, Turkey, Peru, Mexico, Indonesia, South Korea and India normally provide the strongest exposure to a broad-based cyclical recovery. This time will be no different.
With oil coming off the cyclical trading bands and expansion of domestic demand in these countries, we will see a significant ramp up of business activities and larger-than-normal investments in capital expenditure as well as restocking of inventories.
I expect to see some level of outperform from India. With the politics taking a back seat to economic development (latest episodes of far-reaching reforms being approved by the government), I expect to see some real growth emerging there soon. The Reserve Bank of India has stood firm on interest rates. Despite heavy political appeals to reduce the interest rates to promote growth, the Reserve Bank has stood firm on keeping a lid on inflation. So that is going great for us as well.
Turkey will also see significant growth, as it is well-primed for action. Investments into Turkey have been ballooning and it has been able to create an identity outside the Club Med (Portugal, Italy, Greece and Spain) countries of Europe. So we also have that going for us.
If oil does start ramping up, we will see some interesting reforms coming out of Russia. While I am not completely sold on Russia yet, it could be prudent to keep an eye on energy stocks in Russia.
On the other side, Korea will elect its new Prime Minister tonight. Park Geun-hye will likely eke out a narrow win over Moon Jae-in. Regardless of the election results, I expect more policy focus on price stability, better corporate governance and more social spending than there is now. Bond markets are likely to be affected the most, given election pledges for fiscal expansion from both candidates. So we will see decent returns on an equity market participation basis.
With China showing a firm footing on growth, we will have some exciting times ahead in 2013 and 2014.
Let’s just get over the fiscal cliff hump and then we can get started in earnest.
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