Morgan Stanley Research
The report describes the five phases of the emerging markets cycle: "Productive growth," a stage of moderate to high productivity-driven growth; "misallocation," in which there is moderate growth driven by bad macro policies; then "adjustment," then "restoring macro stability," and finally "gradual recovery."
According to Morgan Stanley, a large number of emerging markets have moved into the "restoring macro stability" recently - which means that growth is still weak, but the economy is stabilizing. Russia, Brazil, Turkey, and Thailand are in this category, the report says.
These economies are not necessarily strong yet, but do show signs of increasing stable growth - except for Turkey, whose economy could be negatively impacted after the failed coup attempt. Thailand, for example, still has weak domestic demand and exports, but its economy is growing, partly due to robust growth in tourism, and Russian oil has managed to prosper even with today's low prices.
Brazil is still dealing with an economic crisis, which is exacerbated by its political one - but financial markets reacted favorably to news of the possibility of the president's impeachment, and a Brazilian economist said that "the expected changes in the government and its economic policies could represent the beginning of a gradual return of investor confidence in Brazil," and that the economy should return to growth by 2017.
If these countries move into the recovery stage in the next year, it would drive an acceleration in emerging market growth for the first time in four years. Morgan Stanley expects the GDP growth of emerging markets, excluding China, to accelerate from 2.7% to 3.8% in 2017. Those markets together make up 37% of global GDP.
Countries that are already in this "recovery" phase include Mexico, which has the 11th-high GDP in the world but is still considered a developing country, and India, which has been called the "biggest turnaround story" in emerging markets because of its slow, gradual growth over the past few years.
Meanwhile, China is still in the "misallocation" stage - the one with moderate growth but bad macroeconomic policies. Also in this category is Korea, whose low growth has been largely caused by declining trade with China.
The main problem, Morgan Stanley says, was that the emerging markets took their focus off of productivity in order to expand growth. The last time emerging markets experienced actual productive growth was during 2003 to 2007, the report states.
Then they began engaging in "loose monetary and fiscal policy" - cutting rates and extending fiscal stimulus. And this was only helped by the Fed's quantitative easing, which supported lower rates in emerging markets, as well as by China's massive stimulus that enabled commodity exporters to extend their loose policies.
But that all ended with the fall in commodity prices and China's slowdown, which led to slow growth or even recessions for many emerging markets, and eventually forced them into the "readjustment" phase during 2011 to 2014.
And now many of them are stabilizing - adapting to the low commodity prices, and normalizing monetary policy. Which means that they're somewhere near the "restoring macro stability" phase.
It won't be easy to move into the fifth and final phase of the cycle, and finally start seeing some sustainable growth. India's expansion, after all, is the result of years of political and economic reforms.
Of course, any growth in emerging markets is going to be dragged down by China's slowdown and the deceleration in developed economics. But these economies could be driving the world's economic growth in the next year.