Even Emerging Markets Are Racing
But Global Growth Needs Fiscal Support
The torch is out and Brazil now returns to the drudgery of impeaching its President and bracing for a fierce battle over economic reform that will likely stall at least until the 2018 elections. This is not the story of a country where the stock exchange is up a third so far this year.
Nor is Russia, cut off from Western financing and reeling from the collapse in global oil prices, the kind of economy where stocks should have surged by a quarter since January.
If someone were to ask about how much money investors have made so far in Egypt, Indonesia, Thailand or Argentina, you would not expect the answers to range from 17 to 35 percent.
If it sounds like a puzzle, it’s worth identifying two lessons from these recent market moves. If it sounds unsustainable, it probably is without some additional clear policy support from G-20 leaders who gather next week in China.
The first lesson is that investing is, above all, a relative game. Every investment opportunity must be compared to its recent past. Brazil’s outlook is still terrible, but it is possible to argue that it is less terrible now that a fresh start may be coming into view.
Perhaps more important, investing is a game relative to the other current alternatives. At a time when growth in the developed world is slowing (a meager 1.8 percent this year, according to the Organization of Economic Cooperation and Development) and interest rates area actually negative on expanding swaths of bonds in Europe and Japan, the opportunity costs of venturing into exotic markets are much lower.
In a recent analysis, UBS, the Swiss investment bank, points out that the dividends paid by emerging market companies are now well above what investors can get from U.S. Treasuries, an anomalous gap that has widened further this year.
Of course, the risks of getting paid those dividends as promised are significantly higher than the risks of getting paid by Uncle Sam, but that brings us to the second important lesson from the recent market moves: there is way too much money sloshing around the system.
Easy money from the world’s central banks has driven up stock prices and driven down bond yields almost everywhere. Monetary policy support since the financial crisis has mostly boosted confidence and helped support economic recovery around the world. The results are arguably best in the United States, but even the lackluster growth in Europe and Japan compares well to the alternatives had their central banks been any less forthcoming.
But with financial markets still rising and growth apparently slowing, the party cannot continue indefinitely. Worse, the longer it goes on, the more it is likely to distort and destabilize economic activity and the less effective monetary support can be.
While the debate continues around the causes of slowing global growth, there is little doubt that it is slowing. There is also little doubt that policymakers around the world are fighting the battle to boost growth with one hand tied behind their backs.
Governments have become so consumed with the levels of debt they have run up through the crisis that they have forgotten that one of their central roles is to support economic activity when it is weak and invest in the foundations of growth when money is cheap.
No, fiscal policy alone does not solve more entrenched structural issues. And, no, throwing good money after bad on personal consumption or vanity projects or consumption does little to support growth. Still, there is hardly a major economy that cannot do more to support its long-term prospects, whether through better hard infrastructure, better assimilation of immigrants or better education and research.
There have been glimmers of hope on the fiscal front in just the last few months. Japan’s Prime Minister permanently cancelled a scheduled sales tax increase, which threatened to tip demand into a tailspin once again. Europe’s budget hawks have chosen to show mercy toward Spain and Portugal, agreeing to forgive last year’s budget misses.
In the United States, meanwhile, the iron grip of a few Tea Party Republicans may yet loosen in the new Congress, while neither of the major Presidential candidates seems to put budget discipline at the top of their list of promises. Indeed, for all their differences, both talk about the importance of mobilizing resources in support of infrastructure investment.
These are hardly the makings of a major reorientation in global fiscal policy, but it will be important to build on them as if the world’s recovery is to be sustainable. Global growth doesn’t need to catch up with the recent market exuberance, of course, but it can’t be allowed to sputter out.
Christopher Smart was Deputy Assistant Secretary of Treasury for Europe & Eurasia and Special Assistant to the President for International Economics, Trade and Investment. Before that, he managed international and emerging market investment portfolios.