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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
NationsAs 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 EuropeI hope you find it useful.  As always, should you have any comments or questions, please do not hesitate to call.NickNicolas
S. RohatynThe Rohatyn
Group280 Park
Avenue, 27th Floor WestNew
York,
NY 10017+1 212.984.2901This e-mail communication and any attachments may
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