OCEAN CITY — Although emerging markets have been helping to drive the global economy for some time, analysts at BofA Merrill Lynch Global Research generally expect these developing economies to grow at a slower rate over the long term. There are, however, some notable exceptions — chief among them South Korea, Mexico and Turkey.
According to Alberto Ades, co-head, these three countries (which he refers to collectively as “the KOMETs”) are poised to increase their contributions to global growth in the coming years.
Ades’s asset-price projections use BofA Merrill Lynch Global Research’s Surprise Indices, which keep track of how the actual economic performance of one country or region stacks up against the gross domestic product (GDP) expansion projected by the consensus. Research shows that countries whose GDPs consistently beat expectations historically have been better poised for delivering higher returns, especially in equity and foreign exchange markets.
Mexico’s surprising economy
The International Monetary Fund (IMF) expects that Mexico will post a growth rate of 3.8% in 2012, well above the U.S.’s 2.2%. Looking ahead, the IMF forecasts 3.5% growth in 2013 for Mexico. That is also likely to outpace the U.S.1 Indeed, Mexico was one of the most positive economic stories from 2012, registering strong growth despite continued softness in the U.S., its largest trading partner, Ades says.
Mexico is currently benefiting from two key economic factors, he points out — rising wages in China and higher transportation costs everywhere. Both its proximity to the world’s largest economy and its comparatively attractive production costs are continuing to pull manufacturing away from parts of Asia, and investors are attracted by the country’s well-established capital markets and relatively stable government. Adding to Mexico’s growth spurt was the tsunami that hit Japan in March 2011 and disrupted global supply chains.
Turkey’s geographic and demographic advantage
After posting strong GDP surges in 2010 and 2011 of 9.2% and 8.5%, respectively, Turkey’s economy slowed to a 3% gain in 2012, according to the IMF.2 Still, that rate of growth appears to us to be sustainable, and it looks downright robust compared with that of the rest of Europe, which contracted overall in 2012. Indeed, problems in the European Union are what have been hindering Turkey’s economic output recently. But for 2013, the IMF projects 3.5% growth for Turkey, with the rest of the Continent probably struggling to get back into positive territory.
Demographics are another plus: Its relatively young population is entering its most productive years, Ades says. And the country has a solid economic track record.
The IMF projects 3.6% real GDP growth in 2013 for South Korea, up from 2.7% in 2012, driven by growing exports and higher domestic consumption as incomes rise. In fact, the economic advances that South Korea has made in the past decades are quite remarkable, Ades says. The country boasts an impressive average per capita GDP growth rate relative to that of other major economies around the world.
On the equity side, leading emerging market indexes slipped this past January following the IMF’s trimming of its global growth expectations. Given that diversified emerging market indexes posted double-digit returns in 2012, this drop could provide buying opportunities in select markets for investors willing to ride out continued volatility. Ades recommends that investors consider diversifying their positions through a wide range of exchange-traded funds that target Mexico, Turkey and South Korea, as well as other leading emerging markets. “For most investors, what could make sense is to structure a basket of investments that are well-diversified across a good number of countries,” he says.
In the near term, emerging market stalwarts like Brazil, Russia, India and China (the BRICs) may well be the drivers of that growth. However, for investors interested in the long term, it may help to look beyond current GDP numbers and toward those markets that may be best positioned for continued expansion. With a careful strategy developed around your own risk profile and goals, the KOMETs may provide a timely opportunity.
(The writer is a senior financial advisor and can be reached at 410-213-8520.)