Last week, we talked about the « Great Rotation », e.g. investors moving from bonds toward the stock market. But there is another move that seems to be happening at the same time : funds getting out of emerging markets and coming back into developed countries. According to Morgan Stanley, in the week starting August 14, $760 million have been withdrawn from emerging countries funds, $590 million of which in Asia, for both stock shares and debt obligations. And this is the third consecutive week of withdrawals (L’Agefi).

Is the tide turning for emerging countries? For sure, there is bad news after bad news : growth is slowing in China, in India, Indonesia and Thailand, inflation is back in Argentina and Brazil. What’s worse is that national economic statistics are doubtful, like in China. More and more experts are drawing attention to the growing discrepancy between the GDP numbers published by Beijing and more concrete statistics like power consumption or railway freight...

This brings to light a basic problem in emerging countries. When a country has a long way to go and lets go of the planified economy that was the norm, up until the ‘80s, and that it liberalizes production and commerce, growth is clearly happening. But what about later on? For the economy to keep growing, the big State monopolies have to be dismantled, measures have to be taken so that corruption doesn’t become endemic and that contract rights and ownership rights be recognized... But, sadly, it’s not the case, often. And the « sanction » is growth reaching a ceiling.

In India, like many other countries, the land registry is quite incomplete. It is estimated that 80% of court matters ( and 10% of murders!) are related to land ownership problems. How can agriculture really grow under these conditions? Having to tackle these economic problems, New Delhi is reacting the worst way, by implementing coercitive measures like currency control (individuals will only be allowed to withdraw $75,000 a year, compared to $200,000 before). No wonder investors are leaving the country! Argentina and other countries have implemented currency control (as well as Cyprus, a member of the Eurozone). In India, where gold is one of the main investments, especially for the poor who do not have access to the banking system, the government has decided to raise import taxes for the precious metal by 10%! This tax will not make up for the economic slowdown, far from it.

So, the news is bad, it just shows that this model of development has run its course and, what’s worse, that there is no way to get to another phase, one that would lead to a more « intensive » growth.

It seems that American and European funds are flowing back to their countries of origin... but where are they going? For the most part on the stock market, highly overvalued and kept afloat by the central banks. Severe disillusions are bound to materialize... but this is another story.

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