Golomt, for the uninitiated, is a Mongolian bank whose CEO announced plans on Friday to make an IPO abroad between 2012 and 2013. Hong Kong is favoured, according to a (Chinese) Reuters interview.
Yes, that’s right, Mongolia — whose stock exchange’s Top 20 index is one of the world’s best-performing. Emerging market equities: it’s a brave new world.
But where is that world going? Morgan Stanley asked the question in a Friday note, looking ahead to the situation a decade hence. Emphasis theirs:
Several clients have asked us about the future size and shape of the Emerging Markets (EM) equity universe. While such a long-term forecast is subject to considerable uncertainty, we see major gains in market capitalization of EM stocks and in their share of global equity markets…
MSCI EM market capitalization could be US$7–14 trillion…
…China may account for 39% of MSCI EM Index by 2020 vs. 18% today, even excluding any potential merging of the A and H share markets…
…Financials will retain the top spot. Our forecast of a large increase in the number of EM households with over US$10k of disposable income will likely cause Financial, Insurance and Real Estate to retain their lead sector weighting by market cap.
Gosh, golly, er… Golomt. Do note the rather… variable market cap prediction — they don’t call them emerging markets for nothing. Full workings-out in the usual place.
For what it’s worth, Morgan Stanley believes Korea will take second place in the MSCE EM Index, followed by Russia and Brazil in joint third. No word on Mongolia.
Still, market cap ambiguity notwithstanding, Morgan Stanley’s vision of 2020 is very bullish: emerging markets will march on, ever upwards. Except — they haven’t been, recently.
As Jim O’Neill’s Goldman Sachs Global Economics Weekly (also filed in the Long Room) pointed out on Wednesday:
After significant outperformance in 2009H1, EM equities have not beaten their developed world peers for the last six months. [See Goldman's chart below -- click to enlarge:]
We think this pattern makes more sense than it might first appear. In particular, two forces have been at work. First, the acceleration phase in EM growth and the peak of its relative economic outperformance came in late 2008/early 2009. Since then, momentum in some core indicators has shifted to the developed market (DM) universe. As the market rewards better-than-expected news, not good news, this has been important.
Second, a stronger EM recovery has led to a faster erosion of excess capacity, more upward pressure on inflation, and so to more anticipation of tightening. By contrast, tightening in the biggest DM still looks a long way off, so fresh growth tailwinds here are more unambiguously good for realised growth.
Anticipation of tightening? Just a tad — see the recent perceptions of an Indian rate rise, plus the never-ending debate over Chinese policies.
Of course, Goldman’s argument is that emerging markets will restart outperforming eventually. However, the assumptions behind that argument — such as that markets will take EM policy tightening in their stride — are surely just a bit questionable.
For one thing, Jim O’Neill and friends regard China’s tightening as ‘an appropriate policy response that will not disrupt the growth cycle’. Some beg to differ.
And if China will dominate emerging market indices as much as Morgan Stanley says, well — that’s a rather important call to get right. Good luck, Golomt.
