For years now, emerging markets such as Brazil, China and India have been the go-to place for many investors seeking growth. Most developing countries are growing faster than developed ones, and there’s plenty of opportunities for investors to capitalize on these countries’ growing middle class. But, as a recent HSBC report shows, investing in emerging markets isn’t for the faint of heart.
The HBSC Emerging Markets Index (EMI) Q2 2011 report says the emerging market growth has slowed to its weakest level in two years.
The HSBC EMI dropped to 54.2, down from 55 in Q1 and below the long-term average of 54.8.
Monetary tightening across the emerging markets is partly to blame, says the bank, as central banks try to keep inflation under control. Manufacturing production has also eased. The pace of expansion is at its slowest in three quarters.
“After a strong rebound in the immediate aftermath of the global financial crisis, the pace of activity in the emerging markets has faded,” says Stephen King, HSBC’s chief economist in the report.
He adds that in many parts of the world, there’s been a slowdown in the growth of export orders, something that’s already occurred in developed countries. “This suggests that world trade growth peaked in the first quarter of the year,” he says.
While some investors may be worried about slower growing emerging markets, King points out that many developing countries have successfully stopped inflation from getting out of control.
“This seems particular true of China, where both output growth and inflation fell markedly during the first half of 2011,” he writes.
Despite the slower growth overall, India had the fastest rate of growth of all emerging market service sectors, with Russia a close second. China saw an uptick in growth from its record Q1 low.
What does this mean for investors? As growth slows and investors worry about emerging markets—we’ve already seen market corrections—there are potential buying opportunities.
“[The report] confirmed continued but contained deceleration in economic activity,” says Marc Cevey, CEO of HSBC Global Asset Management Canada. “This is largely the result of recent interest hikes intended to contain inflationary pressures. Fortunately, Emerging market equities are starting to reflect this reality with the recent market correction. In fact, some markets such as China, and to a certain extent the rest of Asia, are showing attractive valuations and healthy earnings growth.”