Emerging Markets - Worth a Look?

In the wake of the world’s economic downturn, growth in developed markets is going to be very hard to come by. In emerging markets, however, growth could be much higher. This possibility is based on several pieces of evidence:

First, emerging-market economic fundamentals have improved over the past decade. Many emerging-market economies have reduced or eliminated their debt and have built up solid foreign currency reserves, making them less vulnerable to speculative currency attacks and allowing for more effective monetary policy.

Second, emerging-market corporate profitability has improved over the past several years and is comparable to, if not better than, that of the developed world. More and more emerging-market companies are shifting focus from survival mode to profit maximization. This focus shift, combined with generally low interest rates (and therefore low cost of capital for businesses), should keep profitability at a higher level. It would take a significant earnings decline or a significant rise in interest rates (or some combination of both) before the corporate profitability/cost of capital gap in emerging-market countries becomes negative. This is seen as a very low-probability risk.

Finally, per-capita income in many emerging-market countries has risen considerably over the past decade, stimulating internal demand. This is in line with the decoupling theory, which holds that some emerging markets (particularly China, India, and Brazil) now generate enough internal demand that they are no longer as dependent on export markets, such as the United States and Europe, to support GDP growth.

While the long-run outlook on emerging markets presents an intriguing opportunity, there could be substantial risk in the short-run. Emerging markets are much less dependent on exporting to the developed world than they have been in the past, and they have also reduced their reliance on foreign capital. This lower dependence on exports to developed countries and foreign capital doesn’t eliminate the risk from a slowdown in the developed world’s growth, but it is a mitigating factor relative to the past. While emerging markets’ dependence on the developed world for growth has decreased, investors may be too optimistic in assuming how independent emerging markets have become. The developed world had been growing at an above-trend rate. Now, as the growth trend of the developed world normalizes (first by contracting considerably), emerging markets could feel a significant pinch. The lingering effect of the global recession on emerging-market growth, as well as the valuation of emerging-market equities, remains to be seen.

The credit crunch resulting from the economic downturn is affecting emerging markets as well. Risk aversion among investors has increased greatly, which has led to losses of foreign, as well as domestic, capital in emerging-market countries. The capital that left emerging markets often fled towards the dollar, seen as a safer currency. The flight to the dollar caused a decline in emerging-market currencies relative to the dollar. This devaluation, however, is expected to be short-lived.

Finally, as the world emerges from the recession inflation could rear its ugly head. Higher inflation may mean higher interest rates and, as a result, lower valuation multiples for emerging-market equities than we have seen in recent years. Also, it may depress local consumption and, as a result, slow company-level earnings more than expected.

Despite the short-term risks associated with emerging markets, the long-term growth expectations show the asset class to provide a real opportunity. Better economic fundamentals, more effective monetary policy, and less reliance on the developed world indicate that emerging markets are worth a look.

Are American Consumers Ready to get Back in the Water?

Retail sales in May increased by 0.5%, indicating, on the surface, that consumers may be ready to resume a higher level of retail purchasing. Could American consumers really be coming around so soon? After a closer look, over half the 0.5 % increase in May retail sales was due to a price-related jump in gasoline sales. In fact, core retail sales, which exclude automobiles, gas, and food, increased only 0.1% (after a 0.1% decrease in April). The actual retail sales trend seems to be relatively flat. This, of course, is better than a decline, and may signal the start of a turn-around for retail sales.
One thing to keep in mind is that, as a result of the increase in gas prices, consumers could be put under more pressure, and even the 0.1% increase in core retail sales could easily be reversed. With most U.S. consumers still feeling the pinch, retail sales should remain sluggish for some time.

Thanks for reading!

Credit Conpamies Under Control - Or Are They?

On May 22, President Obama signed and enacted into law the Credit CARD Act of 2009. Form a consumer standpoint, the most important feature of the Act is that creditors will generally be prohibited from increasing the annual percentage rate (APR) applicable to an existing balance on an open ended consumer credit card unless:
· The account falls 60 days past due
· The index on which the rate is based changes
· It is a promotional rate that has expired
· A consumer fails to comply with a hardship workout plan.
Also, if the APR is increased because a consumer account falls 60 days past due, the creditor is required to inform the consumer that the rate increase will be terminated (and the prior rate restored) once the creditor receives the minimum payments due in a timely fashion for six months.

Other Provisions

-The Credit CARD Act also requires creditors to give consumers written notice within 45 days of any rate increase or other significant change, and consumers must be informed of their right
to cancel an account prior to the rate increase.
-The mandatory minimum for a credit gift card is 5 years.
-Bills must be mailed to consumers 21 days before payment is due.

The feature of the Act concerning notification requirements takes effect 90 days after enactment, while the remaining features of the Act take effect in February, 2010.

The question concerning the Credit CARD Act is what will it actually do for consumers? Is this really beneficial for consumers and will it have any real effect on what rates the credit card companies charge? Taking a closer look at the provisions of the Act, the consumer benefits are not as strong as they would at first seem. Credit companies providing timely, written notice will not prevent people from going into debt (people get notices now, but no one plans on going into serious credit card debt – statements get discarded). Also, the provision requiring creditors to eliminate the rate increase after minimum payment is made for six months is not beneficial at all. This will encourage consumers to just make the minimum payment, even after the original rate is restored. In most cases, the minimum payment on a balance won’t even cover the accrued interest. Just making the minimum payment could send a consumer spiraling into debt. In terms of its effect on credit companies, the Act does almost nothing to prevent them from charging the rates they want. They are still able to present very low, introductory promotional rates to attract consumers, and later jack up the rates, even on those who won’t be able to pay. The credit companies can charge what they want, as long as they give you timely, written notice.

Throughout the current recession, Americans have barely made a dent in their debt burden. This Act is not likely to have an effect on reducing credit card debt, and if it does, its effect will be marginal. In my opinion, people should beware of anyone attributing personal debt reductions in the future to this Act. If Americans do reduce their debt, it will much more likely be the case that they do so because of a change in consumer mentality and behavior. More people will stop borrowing on their houses and outspending their income. This would result in a lower, but more stable, level of consumption than we’ve seen over the last two decades, and less personal debt.

Welcome to EconBlog!

Hi Everyone,

I’d like to take this opportunity to introduce myself and my blog, EconBlog. My name is Matthew Staub and I am an undergraduate Economics student at Lebanon Valley College. I am planning on attending graduate school and pursuing a Ph.D. in one of various economic fields. I am intrigued primarily by micro-economics, financial economics, and monetary policy. I will, however, write about any economic topic that is stirring my mind at the time. I’d like to use this blog to present current issues, critically examine them, and then take into consideration your responses and feelings as readers of my material. I appreciate all opinions and feedback, even those of a critical nature. After all, I’m a student, and my goal in establishing this blog is to expand my thinking and learning, and along the way, provide you as readers some useful information. I look forward to writing and to viewing your comments.