Emerging markets are likely to lead global economic growth this year, with China's economic slowdown appearing to have bottomed, Columbia Management and Threadneedle said in their 2013 International Outlook report on Monday.

Boston-based Columbia Management, with USD 340 billion in assets under management, said approximately 70 percent of the world's incremental global growth is coming from emerging markets - even with the big markets of China and Brazil slowing down materially.

While growth rate levels may not return to emerging markets to what it was during the last decade, it will be of higher quality derived from a consumption-led growth driven by a strong sustainable middle class rather than by fixed asset investment, the Columbia Management report said.

The report said Chinese market data shows signs of the economic slowdown having bottomed, which is a clear plus for equity markets and risk assets generally. Industrial production, retail sales and fixed income investments among other data showed an uptick since September of last year.

"The easing of tail risks in Europe and China leads us to be more positive on equities than we have been for some time," Columbia Management's report said. "We expect the strong to continue to get stronger in the equity space and M&A activity to remain an important driver in a number of markets as companies put their excess cash to work."

Although Columbia Management's long-term view on Japan remains bearish there is a chance that Japanese equities will perform well this year, the report said. But an aging population and a shrinking workforce, a massive government debt problem and signs that the Bank of Japan will not stick with the reflationary policy, could likely hurt any returns from the island.

According to Columbia Management, in 2013, Asian economic growth will depend on exports. The cost advantage in manufacturing that initially took developed companies overseas is still in place, but now in different countries and in different industries.

Overall demographics in emerging markets are much healthier than the developed world, the report said, which will continue to act as tailwind over time. Demographic "winners" include Indonesia, the Philippines, Turkey and Brazil and India, while demographic "losers" include Russia and China.

Young populations with lack of social mobility due to poor education levels and structural unemployment are often a recipe for social unrest such as in parts of the Middle East and South Africa, the report said.

In China, Columbia Management expects to see more progress made by the government in areas including banking sector regulation, exchange rate policy, the development of domestic bond markets and new initiatives to push consumption demand further as a sustainable source of growth.

Investors' main concern is that China is becoming less competitive, particularly on the low end of the value chain as well as the deterioration in the return on invested capital and earnings of the listed companies.
Markets such as the Philippines, Thailand, Turkey and Mexico have continued to post very strong returns supported by very strong fundamentals.

Expectations for emerging market equities are low, but with the help of accommodative monetary policy, growth seems to have stabilized.

Asian fixed income, which has grown sizeable enough in terms of market capitalization, geographic and industries coverage, is now a distinctive choice of an investment asset class for global investors, the report said.

In Europe, some of the periphery countries such as Spain and Ireland appear to be making the necessary structural adjustments, the report said. Greece, through a series of measures has made progress on refinancing itself, "but we are not comfortable they are really dealing with the structural issues."


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