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A shift in power.

Summary: In 2011, perceptions regarding the composition of the global economy underwent a shift - instead of the US being considered as the world's key growth engine, there was increasing realisation that large emerging economies such as China and India were increasing their contribution to global GDP

While several developed economies are still plagued by worries about their sovereign debt levels, many emerging economies are characterised by high growth rates, low to no debt, and high foreign reserves. We believe these fundamental strengths are likely to continue in the months and years ahead, and eventually be reflected in the earnings and share prices of emerging- market companies, over time.

As growth in developed markets is expected to be much lower and fraught with fiscal challenges, we believe domestic demand in emerging countries should play an even more important role in their future growth. Much of the growth in this domestic consumption could be driven by rising incomes and the maturing of a young, working population.

Going forward, one risk we see is sustained high inflation - inflation hit record highs in many emerging countries in 2011. In recent months, however, inflation has eased slightly in some countries, allowing them to move to a more conducive monetary policy. Brazil and Indonesia, for example, have already cut interest rates, and China eased banks' reserve requirements for the first time since 2008. This trend could continue in 2012 as, in an environment of slowing global growth and easing inflationary pressures, emerging markets tend to revert their attention to stimulating economic growth. Governments will also need to formulate appropriate policies to generate employment and address income inequality.

Another risk is market volatility. There will always be unforeseen factors and circumstances that might become catalysts for greater changes in the global landscape, as we have seen from the events of the past year. We cannot exactly predict when the next market correction will hit us, nor know how great or small it will be, but we do realise that market volatility seems to be here to stay, with the increasing interconnectedness of markets and the occasional misuse of derivatives in the global financial system. But we believe with every crisis comes great opportunity. Therefore, we continue to invest with a long-term horizon in companies that we believe are undervalued, fundamentally strong and growing, and those that we think can weather difficult times.

From a long-term perspective, we continue to be positive about emerging economies. In our opinion, balancing growth, inflation and global competitiveness will be the task ahead for many emerging countries in the months to come. We believe emerging stock markets could become much larger than they are today, and over the next decade, their combined value could exceed the combined value of the US, Japanese and European equity markets. nBME

In an environment of slowing global growth and easing inflationary pressures, emerging markets tend to revert their attention to stimulating economic growth

Mark Mobius, Ph.D.


Mark has more than 30 years in global emerging markets. He joined Templeton in 1987 and directs the Templeton research team based in 15 global emerging markets offices and manages emerging markets portfolios. He earned Bachelors and Masters degrees from Boston University, and a Ph.D. in economics and political science from the Massachusetts Institute of Technology

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Publication:Banker Middle East
Date:Jan 30, 2012
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