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The case for emerging markets

While financial turmoil clouds the forecasts for Europe and the United States, emerging-market economies present a far brighter outlook, says Eric Lascelles, chief economist at RBC Global Asset Management Inc.

In addition to having relatively young and growing populations and better-than-average expansion rates, the developing world benefits from lessons learned during its own financial crisis in the late 1990s, he points out in a report.

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Emerging economies have reduced their debt loads, built up hefty current account surpluses and massive foreign reserves and focused on education, freer trade, privatization, deregulation and inflation controls. Their growth has been impressive, he says: Real GDP increased at a 4.8-per-cent annualized rate since 1970, close to twice that of the developed world.

"Their clout and outperformance have grown to such a degree that they now generate almost half of all global economic growth, versus less than a quarter in the 1970s. This is well in excess of their share of the economy."

Despite risks, such as volatile commodity prices and inflationary pressures, developing nations have taken steps to reduce pitfalls, making them an ideal investment, Mr. Lascelles says. Mind you, there is the proviso that emerging markets can no more guarantee a near-term investment "win" than any other asset class, he adds.

Against the grain

Stock market volatility has shaken the confidence of retail investors, but it didn't perturb the "smart money" crowd of institutional investors, according to Pierre Lapointe and Alex Bellefleur of Brockhouse Cooper.

In the first half-hour of a typical trading day, impulsive stock-market players react to overnight news and economic releases. Smart-money managers, on the other hand, take their time to sift through the news and are not averse to investing later in the day, the economists write in a recent report.

The smart money flow index removes the emotional trades that occur at the beginning of the session, measuring the performance of the Dow Jones industrials without the first half hour of trading.

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Just before the recent rebound, the Dow Jones industrial average was down 7.8 per cent since May. Yet, the smart money index was up 2 per cent over the same period, indicating that long-term investors had a more positive outlook, say the authors.

"The optimism of smart-money investors is probably due to stronger economic data, hopes on the European debt front but also to good earnings outlooks. Even with all the uncertainty earlier this summer, we have yet to see a meaningful increase in profit warnings."

Consumer spending snaps back

Don't read too much into what consumers say: Check out what they do instead.

Retail sales increased 0.5 per cent in August, following a 0.5-per-cent decline in July. On a regional basis, they were up in seven provinces.

Yet, the consumer confidence indicator wasn't going in the same direction, says Matthieu Arseneau of National Bank Financial Group.

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"After the significant retail sales drop in July, some analysts were worried by August's sharp decline in Canadian consumer confidence, which reached its lowest level since July, 2009," he writes in a recent analysis.

"In this context, we are particularly pleased to see a rebound. Moreover, this month's gains are broad-based regionally with seven of 10 provinces posting gains. Once again, the drop in confidence is not reflected in consumer behaviour."

Mr. Arseneau says a strengthening labour market and moderating gasoline price hikes helped to support consumer spending. Despite the virtual absence of job creation in July and August, total hours worked rose 4.8 per cent in the May-to-August period. This helped boost discretionary spending, writes Mr. Arseneau.

"Thanks to the August performance, third-quarter real retail sales are running at about 1.4 per cent annualized, an acceleration compared to the 1.2 per cent in the second quarter."

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About the Author
Quebec Business Correspondent

Bertrand has been covering Quebec business and finance since 2000. Before joining The Globe and Mail in 2000, he was the Toronto-based national business correspondent for Southam News. He has a B.A. from McGill University and a Bachelor of Applied Arts from Ryerson. More

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