Developed or Developing

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di Finanza Operativa 3 Settembre 2015 | 13:30

di Walter Snyder, Swiss Financial Consulting

Several indices draw a distinction between developed and developing countries even though it is not always clear on what basis this distinction is made. The difference is important because asset managers often base allocation on indices. One aspect of the problem is that most indicea are the product of companies based in the US or Europe, which results in a bias against countries that are unfortunately located elsewhere. The Western bias against China was evident in the decision of MSCI not to include China in its index for Asia, and the IMF suggested that China would have to wait until September 2016 before the renminbi could be considered to be included in the SDR basket currently featuring the US dollar, the euro, British pound sterling and Japanese yen.

What makes all this remarkable is that China is the second largest global economy. It seems to be the case that many Westerners have difficulty in coming to grips with the changing reality of the present. To this should be added sparse knowledge of the past. For example, Ukraine is a country where corruption is rife and Russian influence more than traditional. After Yanukovich fled Kiev, the new government moved to eliminate Russian as an official language and told Moscow that the naval base in Sebastopol had to be reconsidered. The Russian reaction, which was only to be expected, led to the annexation of Crimea and consequent sanctions championed by the US at the expense of the EU. The attempt of the US to punish Russia has led to a closer Russo-Sino relationship, which presages radical changes in the geopolitical situation.

Investors should realize that such shifts are necessarily going to have consequences on how the global economy develops and should accordingly take defensive measures to protect the value of their portfolios. The attention lavished on the prospect of the FED raising interest rates should serve as a warning sign. Interest rates will rise, and the prices of issued bonds will fall. The next recession will start in the US just like the Great Depression, the Dot Com bubble of 2000 and the Great Recession of 2008. Astute asset managers will have followed the Newsletter’s advice and long since moved out of fixed income (bonds) in order to avoid the disaster awaiting the unwary. The future of the global economy lies in China, which is a newly developed country. The US, Britain and France have to contend with old infrastructure, which requires lots of maintenance and renovation, while China is expanding its modern transportation network faster and faster.

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