But is there anything that can go wrong with emerging markets that the market is overlooking? In short, all roads point to China. The old saying that the “U.S. sneezes and the rest of the world catches a cold” may still be a truism, but China’s role as the key driver for global growth can’t be overstated. China’s propensity to consume the lion’s share of global commodity supplies—it is the largest importer of metals and minerals, with more than 40% intake of iron ore, steel, copper, aluminum, lead, zinc and coal—reflects the significant scale of industrialization the country has seen over the past 20 years. A comparison to the industrialization in the U.S. suggests that China still has another 20 years to go before it reaches a similar level of development. Such prospects not only are positive for global growth but should also continue to underpin the story in Latin America, which has prospered from the strong demand for hard and soft commodities.
There is, of course, a risk that China’s robust pace of growth over the past decade hits the wall—the dreaded hard landing that some have cited as one of the most significant risks to the global economy. While we would agree that the hard landing scenario is arguably the largest tail risk for emerging markets, we think a soft landing is more likely, supported by the recent data that reflect a moderate slowdown. But what if we’re wrong? Well, if that happens, and growth slides from a consensus level of 8.3% in 2012 to 6% or below over the year, risk assets will take a hit. As for the risks to growth, the focus will remain on the property sector, with property investment representing between 10% and 15% of GDP and more than 20% of total fixed investment. Policy measures introduced last year in order to cool the rapid pace of price increases in the residential sector have started to bite, resulting in recent price declines and a slowdown in new land sales, so watch this space.