As is often the case, stock markets sensed a change in affairs long before economists did. Having fallen by 13% over the six months leading up to February 2016, the Russell Index of emerging market equity returns has subsequently risen by 17%.
This year economic data coming out of emerging markets has slowly but surely improved. At CBRE, we track the 'real-time' performance of the world's major economies, using a weighted average of the most timely monthly data series. These 'nowcasts' are strongly correlated with GDP growth over the long term. Over the past three months, nowcasts for two of the largest and most important emerging markets, Brazil and Russia, have turned sharply upwards, indicating a likely exit from recession within the next six to nine months. Although in total these economies account for only 6% of world GDP, they are important regional powers that influence their smaller neighbours.
The obvious cause of the slowing that unfolded in emerging markets over the course of 2015 was the fall in oil and commodity prices. Not only did this hit net exports, a big component of GDP, but it also caused a fall in the values of most emerging market currencies, which, in the short term, necessitated higher interest rates. Moving back one step, the fall in commodities prices is clearly related to the slowdown in China, an economy that now has stabilised somewhat. The fall in oil prices is more complicated to explain, given OPEC's previous success in regulating supply, but it is obviously related to the rise of production in the United States. The Economist commodity-price index has risen by 6% over the last year, and the price of oil by 22.8%. These have provided a boost to emerging markets' external demand. The fact that inflation has fallen back—particularly in Asia—has also allowed interest rates to be cut, which has boosted domestic demand. Other emerging markets that posted encouraging GDP growth in Q2 were China (6.7%, year-over-year—the strongest by far), Indonesia (5.2%), Philippines (7.0%) and Thailand (3.5%).
Yet the picture is not entirely rosy; some countries—Brazil, Turkey or Nigeria, for example—have substantive political issues to deal with, which will take some time. However, their strong growth over the past 20 years means that, collectively, emerging markets have a significant impact on global growth, and therefore on confidence and financial flows. A one-percentage-point decline in emerging markets' GDP leads to a 50-basis-point decline in world growth, according to the World Bank—so a revival for emerging markets is clearly positive for the global economy.
Real Estate Implications
Over the past year, average bond yields in emerging markets have fallen from 6.2% to 4.5% as economic stabilisation has drawn global capital back to these markets. Investors facing near-zero bond rates in the developed world are motivated by the yields on offer. Capital is flowing into emerging market bonds at its fastest pace since 2013, and governments are cashing in: 2016 has so far seen nearly $100 billion of new issuance—a leap above the $60 billion annual pace of 2015.
So far, there is little evidence that real estate in emerging markets is attracting funds at the same rate as the bond market. Real estate yields, however, have narrowed in these markets. If the stock markets and bond markets are pricing risk correctly, then real estate yields of more than 6.5% must be super-attractive. We expect an uptick in capital flows in emerging markets over the next year as investors wake up to the opportunity.