Emerging markets collectively remain “high beta coupled”, so to speak, with their developed brethren per Wednesday’s Lex column, the implication being that an eventual price-to-book convergence and ultimately out-performance (per their relative fiscal fundamentals alone) are in the cards for those investors steely enough to latch on.  Yet while anticipating this homecoming of sorts, now may be the perfect time to finally take a more discerning eye towards EMs instead of lumping them all-together, given that our premise remains that the strong fiscal balance sheets and still largely dormant, demographic dividends upon which much of their stories rest can all-too-easily be undone by an uncouth central bank (not to mention shoddy governance).  Moreover not every economy is equally poised at the same moment to prosper equally, even from the loosest of monetary policies.  Martin Sandbu’s Monday FT piece on Chile and the “middle income trap” is case in point as it underscores the importance of total factor productivity (TFP)—i.e. how efficiently capital and labor are combined–in helping to ease a given population’s transition from developing to developed as its PPP adjusted, GDP/capita invariably rises (in fact, a World Bank report from 2008, “Unleashing Prosperity” demonstrates that TFP is the fundamental driver of real output among developing nations).  With this in mind Sandu notes that “Chile’s record is disappointing”, a mild understatement given that until only recently the figure has been negative.  Even a recent estimate of around 1% sits well beneath the average emerging market annual rate of 2.4% from 2005-2008 (compared to 0.2% in advanced economies for that same period), a number which has admittedly declined per The Conference Board “as transitional productivity effects appear to [be abating] in some of the major emerging economies.”  Thus, as the BCCH (Chile’s central bank) soon embarks on what the consensus now expects to be a 100bp easing cycle delivered in four consecutive 25bp cuts to help combat what analysts expect are downside risks to the 3.9% q/q saar GDP forecast for Q3 11, realize that while the monetary catalyst may be coming, the results could be underwhelming.

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