Subject: The Rohatyn Group - Emerging Markets: Strength in a World of Indebted Nations
From: "Nick Rohatyn" <[email-masked]>
To: <[email-masked]>
Date: Mon, 19 Jul 2010 16:59:55 -0500 (CDT)

Dear Hunter,

Greetings, I hope this finds you well.  I am pleased to provide you with our latest research piece, Emerging Markets: Strength in a World of Indebted Nations.  I have excerpted from the Executive Summary below to give you a taste of its contents, but hope you will take the time to read the attached document.

Excerpt from the Executive Summary - Emerging Markets: Strength in a World of Indebted Nations

As we approach the third anniversary of the global financial crisis, the world economy, by most accounts, is staging a moderate recovery. This recovery is occurring at a faster pace in emerging market economies than in industrialized economies. In fact, some emerging economies are now growing at or above capacity.

Despite the encouraging signs of a global economic recovery, the crisis left behind an uneven legacy of fiscal challenges for policy makers. In many developed countries private sector de-leveraging over the last two years has coincided with large increases in fiscal deficits and national debt. These challenges and the need to address them are likely to be a lasting burden on economic growth for these countries. Fiscal adjustment will also be a critical policy issue for most of the developed world in the years to come. At the extreme, a failure to address fiscal imbalances in the most heavily-indebted nations could pose systemic threats to the global banking and financial sectors.

In this report we discuss the fiscal legacy of the financial crisis and extend a framework we have previously used to rank countries according to the size of the fiscal shocks faced and the degrees of freedom afforded to policy makers. We use this framework to differentiate not only between developed and emerging economies but within the latter as well. We refine these results further by estimating the required fiscal adjustment effort needed to bring indebtedness ratios to sustainable levels in the medium term for a universe of 50 developed and emerging economies.

The conclusions of our analysis are generally favorable to emerging economies. These countries came into the crisis with clean balance sheets relative to developed economies, and the crisis accentuated this differentiation. For several years to come, growth is likely to prove stronger and more stable in emerging economies than in the developed world. This has powerful medium-term investment implications which we believe are not yet fully factored into asset prices. These include:

(i)  Divergent emerging/developed country growth paths will likely sustain “carry trade” flows and pressure for emerging market currencies to appreciate relative to those in developed markets.

(ii)  Foreign exchange reserves will continue to accumulate in emerging market central banks supporting narrow spreads (over US Treasuries) for hard-currency emerging market sovereign debt. In addition, sovereign bonds denominated in local currency will increasingly be accepted as substitutes for developed market fixed-income securities.

(iii)  Within emerging markets, Asian and Latin American economies and assets will outperform those in the periphery of Europe

I hope you find it useful.  As always, should you have any comments or questions, please do not hesitate to call.

Nick

Nicolas S. Rohatyn
The Rohatyn Group
280 Park Avenue, 27th Floor West
New York, NY 10017
+1 212.984.2901

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