Investment research firm Alpine Macro believes that emerging markets provide the most interesting short and long term investment possibilities, says its Chief Fixed Income & FX Strategist Harvinder Kalirai.
The reason for this call is his expectation that the Federal Reserve will ease monetary policy aggressively to expand the business cycle. In fact, FX Strategist Kalirai expects the US central bank to ease more than the market currently anticipates.
Additionally, he believes China will ease its credit policy. "This is an optimal mix for emerging markets," he explains.
"While US equities look expensive and European equities are relatively fairly valued, most emerging market equities are pretty cheap and this is where we see the biggest upside as most of these markets benefit from a weaker USD".
Adding an extra China to the global economy
The macro researcher believes that the long-term potential economic growth rate in the US economy is around 1.5 percent, and in Japan it is basically zero as productivity gains are off-set by demographics – and Europe's potential is somewhere in between.
"From a long-term perspective, this will not drive global growth and corporate profits. Emerging markets will. We do not subscribe to the view that China is already falling into a middle-income trap. It's much too early for that," he says.
China's GDP per capita was USD 9,771 in 2018, according to the World Bank. Kalirai believes that the world's most populous country can still double this figure to roughly USD 20,000. In comparison, the figure is 62,641 in the US.
Given that their labor supply is falling, and the population is aging quite dramatically as a consequence of the former one child policy, is this a realistic scenario?
"We think that the demographic story is being overplayed in China. First of all, it doesn't happen for another decade. It's much too soon to really worry about demographic decline. It's more a story for the 2030s and onward," the strategist says.
Secondly, he mentions, even when China's population begins to decline it is worth remembering the 400 million on subsistence farms.
"These people are not employed productively from an economic point of view - so even if the population starts to marginally decline, you can still bring 400 million people into productive economic life."
Growth equals political stability
Could the current uprising in Hongkong spillover to mainland China and eventually have an impact on the political stability?
"Not if the government delivers in terms of rising living standards, then those pressures for change will remain contained," he says, adding:
"There were the Tiananmen Square protests in 1989 and that uprising was one of the factors that forced the government for foreign investments. This sparked the economic growth seen in the past decades and when the government delivers and people see that their children's lives will improve, the day of reckoning gets pushed further into the future."
The days of double-digit growth rates are over, he adds, but for the next decade Alpine Macro expects China to deliver growth rates of around 5-6 percent by using all available tools.