Every so often, one thinks that something has changed, and it is time to alter one’s portfolios to reflect this. And what has changed is that the surge in emerging economy growth both in absolute terms and relative to that in developed economies has now come to an end. Two factors are important – emerging economies relative labour advantage has been eroded through rising wage costs and following on from that, export led growth will be much more difficult. Secondly, capital is still flowing from emerging economies to the developed world, partly capital flight and partly portfolio diversification. Thus it is hardly surprising that developed markets are outperforming emerging markets. Sadly, in terms of reorganising portfolios, it is easier to see those sectors that will suffer from this trend as opposed to those that will benefit. These are commodity producers who will not find China such an easy place to sell to, and secondly, companies who have profited from cheap outsourcing from China, such as IKEA. One consequence of this change is that the growth in income inequality within both developed and emerging economies may well have come to an end. The reasons are rising wages in emerging economies and in developed economies, the shift of manufacturing jobs overseas is now being reversed.

The IMF and Greece

The IMF has commented that whilst Greece has made real progress in rebalancing its economy, it has made virtually no progress in improving productivity. The rebalancing has come at the tremendous cost of a fall in output of 25% from its peak in 2007. Greece is seriously lagging in its commitment to privatisation, liberalising regulated professions, and on judicial and labour market reforms. Part of the problem is that the severity of the recession has increased resistance to reform. Greece is caught between a rock and a hard place as reform is easiest to implement in a time of growth but is most needed when the economy is depressed. Whilst the cyclical outlook is improving, it is not at all clear that Greece can move into a period of sustained growth.