11 September 2015 Asset Allocation real value of exchange rates over long periods, i.e., deviations are long lived but cyclical and mean reverting. But EM FX by contrast is massively structurally (always) cheap on a PPP basis, given their earlier stage of economic development. EM real exchange rates will likely converge to PPP only with the convergence of per capita incomes, i.e., in the very very long run. So the cheapness of EM FX on a PPP basis is not cyclical but structural (How Much Will Fast Growing EM Currencies Appreciate, Sep 2005). • The $35 trillion myth. Using PPP exchange rates raises the size and weight of EM in the global economy massively. To get some idea of how much, consider some of the bigger emerging markets exchange rates versus their PPP levels. For China, a market CNY of 6.4 versus the dollar compares with a PPP rate of 3.6. So measuring Chinese GDP at PPP exchange rates raises it 1.8 times. For India, a market INR of 66.5 compares with a PPP rate of 18, which is 3.7 times higher. For EM as a whole, nominal GDP of $30 trillion at current market exchange rates compares with $65 trillion at PPP rates, i.e., a more than doubling. This is $35 trillion of EM and global GDP which does not and has never existed. To put it in perspective another way, the size of the overstatement is about two US GDPs. Global growth has been rising when measured using market rate based weights Using rolling market exchange rate based weights global GDP growth has historically been lower than the IMF's headline measure based on PPP rates. averaging 2.9% versus 3.5% at PPP weights. Global growth bottomed with the European financial crisis in 2012 at 2.4% then rose to 2.7% by 2014. still somewhat below trend or average rates. The arithmetic of EM and global growth. • DM still bigger than EM. At PPP rates, EM accounts for 57% and DM 43% of global GOP. This differential is the source of current perceptions that EM is more important for the