Emerging Markets Weekly

Investors interested in the contrasts between India and China on the one hand and the US on the other might consider the vastly different economic consequences of the current credit crisis.

Growth prospects are the first place to start with the contrast overwhelmingly wide. The World Bank forecasts GDP growth for India and China this year at 5% and 6.5% respectively and rising to 8% and 7.5% respectively in 2010. In a study of contrasts, the U.S. economy will contract at a 3% rate in 2009 and rise 1.8% in 2010. Similarly, industrial production will rise 7.4% in 2009 yet contract at a 12.5% rate this year in the U.S.



Retail sales have risen strongly in China in 2009 at a 17% annual rate of change. In contrast, retail sales in the U.S. have fallen sharply for the first time in decades. American consumers have hit a debt wall with little prospect for recovery in the near term.





One of the more interesting developments is the rise in emerging market bond yields versus the rise in high yield bonds in the United States. In the last U.S. economic recession, bond yields spiked up across all risk assets high yield bonds and emerging market bonds alike. This time around, emerging market bond yields (EMBI) have not risen in lockstep with high yield bonds indicating that sovereign borrowers in the likes of India and China are far less risky this time.



The near term credit crunch is a study of contrasts and looks likely to expedite the long term convergence of emerging markets to developed market standards. Mortgage penetration for example is very low in India and China, 8% of GDP and 13% of GDP respectively. Mortgage penetration in the U.S. at 82% of GDP has obviously gone beyond all measures of sound economic policy.

As credit rises in the India and China, for example, the financial sector will be a prime beneficiary. Credit on the other hand continues to contract in the U.S. economy and will likely do so for the next year or two.