In the previous article, we looked at the return in foreign economies thus far in 2006. In this section we will look at the economic fundamentals of some of the key economies in 2007. In the next article, we will look at the prospects for stocks in some of these economies in 2007 and look at sectors that may do well.
The size of the world economy is 50 trillion dollars with the US contributing about 26% and the EU contributing about the same. IMF forecasts the EU zone economies to expand at the rate of about 2 - 2.5%, the US economy to expand at around 2%. The growth in Canadian economy would be around the same number and the world wide economic exapnsion to remain intact at close to 5%. The emerging economies are expected to do well - growing around 5% in 2007. Of the emerging ecomonies, Indian economy is expected to grow at around 9%/year and the Chinese economy is expected to continue posting double digit growth increases.
The emerging markets comprise of economies of South America, Mexico, South Africa, Eastern Europe and Asia. Let us look at the growth prospects in these segments.
The Latin American economies are expected to grow about 5% this year, 4.2% in 2007 and about 4% in 2008. The fundamentals are good for the Latin economies with commodities prices buttressing the export engine of these countries. The large economies of Brazil and Argentina are expected to do well in the coming year. Mexico is also expected to do well with its economy growing at 3.8% in 2007 compared to this year.
According to IMF, the economies of western Europe are expected to grow around 2% in 2007 and the emerging economies of central and eastern europe are expected to grow more than 5% in 2007. Many of these economies are part of the emerging market funds.
The Asian economies are expected to do well in 2007. As noted earlier in the article, the dragon, tiger economies of China and India respectively are expected to do extremely well with growth rates of close to ten percent. The South Korean economy is expected to grow in the 4-5% range. The largest economy in the group, the Japanese economy is expected to post a modest 1-2% growth.
Given the continued projected growth, the main issue a US based investor has to look at is the strength of the US dollar versus the world currencies. Given the huge trade gap that exists between US and the rest of the world, there is a good chance the dollar will not appreciate significantly against the world currencies. On the other hand, strengthening economies of Europe and Japan may cause the local central banks to increase the interest rates to stem inflation. At the same time, if the US economy slows down, the federal reserve may have to reduce the short term rates. In this scenario, the US dollar becomes a less attractive financial instrument for the central banks and hedge funds. However, the currency rates are very difficult to predict correctly and the fundamentals may take a long time to unwind. The main reason for this is that millions of peoples jobs and livelihoods are dependent on stable currency rates and a significant decline in the dollar can cause world wide recession.