With the European debt crisis dominating market headlines in recent months, much less attention has been paid to the state of emerging markets, which struggled over the course of 2011.
From China to India to Brazil, growth disappointed while inflation, although beginning to fall, remains high. Broad market indexes in those countries are also down roughly 20% YTD and the iShare MSCI index is down just as much.
But these drops have much more to do with what's happening in Europe over what's happening with fundamentals, says Dan Morris, global strategist for J.P. Morgan Asset Management. "The increase in risk aversion because of Europe has a big impact on emerging market equities, whether or not the fundamentals in emerging markets are better or worse," he says. "Since we expect things to improve within Europe, that risk aversion should fall so that particular drag on emerging markets should go away."
Yes, that's right. Morris believes the renewed concerns of Europe's impact on the global economy are overblown, and expects EU risk to dissipate in 2012. (See: Actually, the World ISN'T Ending and Europe Will Survive: JPM's Morris)
What does that mean for developing nations?
According to Morris, China will be the country to benefit most as the rest of the world realizes Europe is not such a big risk after all. However, the improvement in China's economy, and other emerging markets, will not necessarily be export-driven, but rather driven by growing internal demand, he says, highlighting China's recent export-import figures.
In November, exports from China fell for the third straight month, growing 13.8% compared to 15.9% in October. Imports were also slightly down from October at 22.1%, but stronger than September's 20.9%.
Stronger internal demand from China and other EM nations is right in line with the prediction of another recent guest, Daniel Franklin of the Economist, who says emerging economies are set to overtake the rest of the world as the biggest importers of goods in 2012. And by 2014, China alone will surpass the United States as the world's biggest importer. (See: China's Urgent Task: Maintain Growth While Fighting Inflation and Social Unrest)
"Countries in southeast Asia which export to China for the domestic market as well as other commodity exporters like Australia and Brazil" will certainly benefit from strong demand from China in 2012, Morris says. As for growth, he believes China is set to continue along the trajectory of a soft landing, despite worries about the property sector and municipal finances there.