Don't Count Out Emerging Markets

People are probably wondering why I can be so bullish about equity prospects going forward when the consumers and financial institutions in the US are still so fundamentally weak. Take note that US GDP is 70% comprised of consumer spending, with 25% of GDP being discretionary spending.

In fact, despite leading indicators like auto sales and housing starts in the US starting to bottom, I am not drinking the V-shaped recovery bourbon. In fact, I don't think the actual recovery will feel like much. Looking at Bank of America's forecast of GDP growth and consumer spending growth, they don't think much of the benign GDP recovery will come from the consumer at all.


So where will the added boost come from? A lot of people underestimate this (a lot even don't believe it), but I believe a lot of the boost will come from emerging market demand leading to improved exports for the US, and also the indirect effects of emerging market economic recovery on the US. The weak US dollar, with the yield of the 3-month US LIBOR falling below similar Yen denominated rates (the borrowing currency of the "infamous carry trade"), will be a boon to US exports.

We cannot discount the new world order. The demographics speak for themselves. The massive population in China, Brazil, India and other Asian economies, together with the rising middle class and Western-educated young entrepreneurs is a secular megatrend that cannot be reversed.

China is the biggest emerging market of them all, and despite recent concerns of policy tightening due to the run-up in asset prices, China will not do anything to hinder domestic demand when its own exports and overall recovery are still not in stable footing. In fact when a lot of people think China will constrain lending to restrain demand for the local property market which has seen asset prices rise so rampantly with the introduction of government stimulus, China has relaxed capital requirements for landbanking to increase supply instead. It is a given fact that China will continue its expansionary policies while US/Euro growth is still negative. The Chinese will continue to be hungry for cars, appliances, gadgets and other goods produced in the West.

Another point I want to make is that the S&P 500 is increasingly influenced by external/foreign demand, with export-oriented companies and foreign operations (mostly technology, commodities and industrial companies). One can't also discount the indirect effect of emerging market economic recovery on the S&P 500... the fact that a lot of companies in the index have their revenues tied up to commodity prices like oil, steel, aluminum, etc. which is in high demand in infrastructure-needy emerging markets. In fact, it is estimated by Bank of America that while 30% of S&P 500 earnings comes directly from foreign sources, when you factor in the increased earnings from cyclical commodities, this number increases to 45%. So while the US economy whimpers along, the S&P 500 will see its happy days again.