The case for economic rebalancing
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Christine St Anne: The developed economies continued to be plagued by economic woes, while the emerging markets have been growing strongly. Today, I am joined by PIMCO's Ramin Toloui to look at the case for economic rebalancing. Ramin, welcome.
Ramin Toloui: Thank you.
St Anne: Ramin, in your recent paper, you look at economic rebalancing. Can you give us an insight in to this?
Toloui: Sure. I mean the global economy is going through some very important transitions right now, highly indebted industrial countries are less able to consume and support global economic growth, and emerging market countries with lower levels of debt are bearing an increased burden of supporting the global economy.
So, about 70% of global economic growth this year will come from emerging markets. In fact, that's important for a transition in the global economy, it's one that allows industrialized countries to reduce their levels of debt over time without harming overall global economic activity or while minimizing the harm to global economic activity.
That's on, what we call, the real economy side. On the investment side, we are also seeing more and more interest by global investors in allocating to emerging markets, because their existing portfolios have very low allocations, and in particular low allocations relative to these very strong growth prospects.
St Anne: So, Ramin, in your experience investors are actually rebalancing their portfolios in favor of emerging markets?
Toloui: Yes. This is definitely something that's not just theoretical. We're seeing it happen in real time. One example of that is in the spring Norway's large government oil fund, one of the large Sovereign Wealth Funds in the world made the decision to shift its bond allocation from a market capitalization weighted allocation, which had very high investments in highly indebted industrialized countries to a GDP weighted allocation for the express purpose of increasing the weight to emerging market countries.
If we look at some Asian bond markets this year, we see that Norway is the largest purchaser of bonds in those markets. So, what Norway is doing is something that's been mirrored by other large sovereign investors and also other large institutional investors like pension funds and increasingly by retail investors who look at their portfolios and see that they are lopsided in their allocations to developed markets and inadequately or too small in allocations to emerging markets.
St Anne: Ramin, so this rebalancing led by investors could that actually lead to a better outcome for world economies?
Toloui: Well that, if you put it on the chalkboard, that's kind of the hope and that is the way in which the price signals that are sent by asset markets should shape global economic activity. That is, as investors shift from developed countries to emerging market countries that helps lower interest rates in emerging market countries, making credit more widely available to support additional household consumption to support business investment.
It also tends to cause emerging market currencies to appreciate, to go up in value and that encourages emerging market countries to export less and produce more for the domestic market. And so this is one important way in which what's happening in asset markets is related to this process of rebalancing the global economy. So as investors make decisions that are in the interests of their clients, this is actually something that helps facilitate this broader process that's necessary to rebalance the global economy.
St Anne: Ramin, as you are probably aware China is of particular importance for Australian investors. As an emerging market specialist what is your outlook for the country?
Toloui: Right. Well, China is a very interesting case. China is a country that grew at an annual rate of more than 10% in the last decade and in our view is likely to grow at a rate more like 7% over the next five years. The reason for that is that some of the drivers of China's economic growth in the last decade; exports to industrialized countries and investment, has sort of reached their natural limits. The exports, because of high debt levels among their consumers in western countries and investment, because they had a very aggressive investment program following the global financial crisis.
So, when we look at what that means in terms of the numbers and the sources of Chinese growth this likely means that the Chinese economy is going to slowdown and that the composition of growth will shift more in favor of domestic and household demand. That means that the impact that China has had on the rest of the world will change in the coming five to 10 years relative to what it was in the last 10 years, and for Australia in particular, it means that the demand that China has had for commodities to support its very aggressive infrastructure and investment program is much likely to be lower in the coming period than it has been historically.
St Anne: Ramin, thanks so much for being with us today.
Toloui: Thank you very much.
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