Headwinds predicted for emerging markets

April 30, 2014

Emerging markets2

The threat of rising interest rates, a slowing Chinese economy and weaker commodity prices pose serious threats to emerging markets around the world, according to two leading economists.

“These global tailwinds are becoming headwinds,” said Nouriel Roubini, who told the audience at the Milken Institute’s Global Conference that the prospects for many of the world’s rising economic superstars, including countries like Brazil and Indonesia, looked increasingly bleak for the coming decade.  

In Roubini’s view, many of those governments had contributed to their problems by failing to undertake the structural reforms needed to keep their economies on track once the easy money stopped flowing.

Jason Cummins, chief economist for Brevan Howard, agreed that the emerging market story should be getting more attention from the global financial community given the billions of dollars that had gone into those countries seeking higher returns.  

“A lot of these things we predicted as investors are broken business models,” he said during the panel “Keeping Up with Change.” That includes “the idea that you can dig up stuff from the ground with very expensive equipment and lots of leverage and send it to China.”    

Cummins called it “a structural fundamental megatrend break in what people have gotten used to.”

The economists also agreed that the U.S. economy was at greater risk from the Federal Reserve acting too late to raise rates – and allowing an asset bubble to develop – than from having America’s central bankers move too quickly.

On other areas – such as the threat posed by escalating tensions between China and Japan - the economists were far less aligned.

Roubini likened the current tensions in the Pacific to World War I, when the world lacked global institutions devoted to diplomacy and economic cooperation. 

“Sometimes politics takes the upper hand when nationalism becomes more important,” he said.

While acknowledging the historic rivalry between Japan and China, Cummins expressed confidence that China’s leaders recognized the risks that a war, trade or military, would be a lose-lose situation for everyone, most importantly the Chinese people. 

“If there are any leaders in the world who understand that the economy is not a zero-sum game, it is China,” he said.