RUCHIR SHARMA -ON WHERE TO LOOK FOR SURPRISES IN 2013!!

Once again Ruchir Sharma comes up with an original insight for the market outlook in 2013.

Below are excerpts from the ECONOMIC TIMES NEWSPAPER IN MUMBAI on Monday 14th January 2013.

LINK:

Surprises might deflate the bubbly confidence in emerging markets ...

Even as investors continue to remain bearish about developed markets in the USA and the Eurozone, they remain oddly complacent about the prospects of emerging markets in Asia.

As he says at the end of his article, "" If you're looking for negative surprises, don't look in US or Europe, the starting point of the last two global shocks and where the risks are well-telegraphed. Crises occur when the consensus is too confident, spending and debt too loose, and right now, the early warning signs are gathering in the emerging world.""


Here is a more detailed excerpt

So what surprises might deflate the bubbly confidence in emerging markets? The first candidate is China, where the consensus forecast is still for GDP growth of 8% this year despite the fact that growth slipped below that level in 2012 and the strong case that China is just too big and middle-income a country to continue growing so fast. A major growth shock in China could rattle the commodity markets and the indebted emerging market countries, as 60% of the countries in the global emerging market bond indices are heavily dependent on exports of commodities. 

Even perma-bulls on China are beginning to worry about two factors: incoming leader Xi Jinping has warned that rising corruption could lead to "the collapse of the party and the country", as he senses the popular resentment that has built up following the sharp rise in cases of bribery, graft and ostentatious spending by government officials in recent years. Second, liquidity outside the traditional banking sector is growing much too rapidly and this striking rise in liquidity is finding its way into all kinds of murky debt products. 

The main issue is that this proliferation of alternative and local sources of credit is very difficult to track, so no one can fully quantify the risks. One investment bank calls wealth management products (WMPs) the CDOs of China — a reference to collateralised debt obligations, the exotic US debt instruments that triggered the global crisis of 2008. That's extreme, but systemic risk to the financial network in China is growing. 

Another potential surprise from the emerging market world could come from a nation most likely to disrupt the spectacular boom in the global bond market. The reality is that macro stability, which so many emerging nations laboured to build in the last decade, is starting to erode in a few important markets, including some that have sizeable deficits in both the overall current account balance and the government's deficit. The twin deficits in South Africa and India are particularly worrying, in part because no one has seen a crisis in a major emerging market in 15 years, and because most investors expect 2013 to be much like 2012. If an unexpected shock comes in one of these big countries, it could prove highly contagious. 

Given the political winds in South Africa, it looks like the bigger risk. President Jacob Zuma has reversed the one major achievement of his African National Congress successors: macro stability. Government spending is rising fast, fuelling a rise in real wages that is driving up consumption, and both the government deficit and the current account deficit are now around 5% of GDP.
Currently, South Africa's financial system is ranked as one of the best in the world. But with weak foreign reserves and a very heavy foreign presence in its stock and bond markets, South Africa is highly vulnerable to capital flight. Social tensions are also on the rise as the country has one of the lowest employment rates in the world and the economy is expanding at too slow a pace to create new jobs. So, if South Africa begins to totter, its size and reputation could produce a contagion effect. 

Let us hope history and the consensus hold, and year five of the market recovery proves uneventful, and profitable. If you're looking for negative surprises, don't look in US or Europe, the starting point of the last two global shocks and where the risks are well-telegraphed. Crises occur when the consensus is too confident, spending and debt too loose, and right now, the early warning signs are gathering in the emerging world.