Emerging markets 2006: So say Goldman Sachs
Derek Moorehouse - Wed 08 Feb, 2006
"... emerging markets 2006...These are the conclusions that Goldman Sachs reached...In a new report entitled 2006: BRICs and Gold, the New Barbell Strategy, Goldman forecasts global real GDP growth of 4.2% in 2006. In emerging markets, it predicts that real GDP will increase by 6.5% this year. Rapid growth in the BRIC economies means that the dependence of the world economy on US growth is diminishing, Goldman argues..."
This year is set be another great year for emerging markets, and all investors should have gold on their radar screen. These are the conclusions that Goldman Sachs reached in its outlook for 2006.
Brazil, Russia, India and China, the BRIC economies, were first analysed together as a group by Goldman Sachs in a 2003 report, Dreaming With BRICs: The Path to 2050. Goldman predicted that the four countries together could outstrip the G6 in US dollar terms in less than 40 years. About two-thirds of the BRIC GDP increase was forecast to come from internal growth, with the rest the result of currency appreciation.
China’s GDP may be larger than that of the US by 2050, with India in third place, Japan in fourth and Brazil and Russia in fifth and sixth, Goldman said. The report also looked at the world economy of the 1960s to see what the same forecasting methods would have said about today – and found no major errors in identifying the largest economies.
Emerging markets 2006: Equities are cheap
In a new report entitled 2006: BRICs and Gold, the New Barbell Strategy, Goldman forecasts global real GDP growth of 4.2% in 2006. In emerging markets, it predicts that real GDP will increase by 6.5% this year. Rapid growth in the BRIC economies means that the dependence of the world economy on US growth is diminishing, Goldman argues. That means the world economy is now in a much stronger position to cope with a US slowdown or to withstand a sudden increase in bond yields. So the strength of the BRICs is not just good for emerging market investments but is positive for your equity holdings in developed countries as well.Making a conservative assumption of sustainable growth in world GDP of 2.5%, Goldman calculates that the global equity risk premium stands at about 3%, above its average level of the last 25 years. If the growth assumption is lifted to 4%, then the equity risk premium stands at 4.5%, well above its level at any time since the start of the 1980s. That implies that global equities are still cheap and have not yet priced in the beneficial impact of the integration of the BRIC economies.
Emerging markets 2006: Back emerging markets!
But it’s in emerging markets themselves that the most money can be made. Despite superior growth prospects, valuations are still much cheaper than in developed markets. Michael Hartnett, an emerging-markets strategist at Merrill Lynch, estimates that 35% of all traded companies in developing countries sell for less than 10 times forecast earnings.While investing in China directly is dangerous due to uncertainty over corporate governance standards and accounting principles, not to mention the levels of stock in publicly traded companies held by the government, an expertly managed fund such as Templeton can provide some exposure within a diversified emerging-markets portfolio. China was one of only three emerging markets to fall in 2005, the others being Malaysia and Venezuela.
Emerging markets 2006: Your ‘must have’ real asset...
Holding gold is a useful insurance policy in a commodity that can also benefit from accelerating Asian economic growth. Demand in India, the largest purchaser of gold jewellery, increased 47% in the first half of last year. Growing interest from central banks in emerging markets is another positive factor. Russia’s central bank said in November it may double its gold reserves. Central banks in South Africa and Argentina have also said they may increase their gold holdings. Goldman calls gold “the hedge to have when you’re not quite sure what you’re hedging against.”Bond yields remain below long-term averages, according to Goldman figures, meaning that the opportunity cost of holding gold as a hedge against inflation has declined. The metal has rallied in recent years – a sixth year of gains in 2006 would be the longest winning run since central banks allowed gold to float free in 1968. But in inflation-adjusted terms, the current price of around $500 an ounce is nowhere near the high of 1980. According to Robert Sahr, a professor at Oregon State University, the high of $875 reached in 1980 would equate to $2,050 in today’s money. Goldman Sachs predicts an average price of $515 in 2006, compared with an average of $444 last year. Concern that high energy prices will produce inflation and the possibility of a decline in the dollar will prompt buying of gold this year, according to Goldman.
Emerging markets 2006: In spite of the headlines, the world is getting safer
The overriding message from Goldman Sachs, however, is upbeat. Likewise, research published in October by the Human Security Center at the University of British Colombia may surprise some investors. The report, War and Peace in the 21st Century, finds that the world has become a dramatically safer place over the last few decades. The number of armed conflicts in the world has dropped by 40% since 1992, while the number of genocides has fallen by 80% since the end of the Cold War.The average number of casualties in a war fell from 38,000 in 1950 to 600 in 2002, and attempts at coup d’état fell from 25 in 1963 to 10 in 2002. Greater mediation efforts by the United Nations, and a strengthened international justice system willing to put on trial rogue leaders like Saddam Hussein, are cited as factors that have bolstered security. Constant media coverage of the armed conflicts that have broken out has obscured these facts. Peace and political stability are the essential building blocks of economic development. The world in 2006 will belong to the optimists.
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