written by William Billeaud, President of Lombard Global, Inc.
The author, Ruchir Sharma is head of Emerging Market Equities and Global Macro at Morgan Stanley. As such, he manages about $25 billion in emerging market assets. A few major takeaways from the book:
1) The nations that have reveled in the global commodity boom driven by mainly China, will “face a disheartening return to the mundane ordeals of a normal life”. As an example: “Since 1990, China’s share of global demand for commodities ranging from aluminum to zinc has skyrocketed from the low single digits to 40, 50, 60 percent–even though China accounts for only 10 percent of global output”.
2) The 50/50 rule: political systems don’t impact growth for better or worse; political leaders do. Turkey, under Erdogan is an example of a political leader who “gets it”; Vietnam’s current leaders, on the other hand, do not.
3) The typical business cycle lasts about 5 years, from the bottom of one downturn to the bottom of the next, and the perspective of most practical business people is limited to one or two business cycles. “As much as we love the speculative titillation of futurology, no one can forecast the next century with any credibility”. Thus, this book best forecasts the next 5-10 years out, much like firms such as Bone Fide attempt to do for their clients. This is fairly standard in the industry, looking to these cycles as guidance for the future.
So….In a world reshaped by slower global growth, we need to start looking at the emerging markets as individual cases. The following are summaries:
China: He is not bearish, but not overly bullish either. Growth will slow down dramatically, but the country still has so much going for it, that it will not collapse. Expect the new normal for GDP growth in China to be around 6-7% instead of 8-10%. This will feel like a mild recession to those in that economy and a major recession for investors who have bet on 8-10% growth, but even at a 6% growth rate, China will remain the largest single contributor to global growth in the coming years.
India: Sharma puts the probability of India’s continuing status as a breakout nation as closer to 50%, because of a whole host of risks that Indian and foreign elites leave out of the picture: bloated government, crony capitalism, falling turnover among the rich and powerful, and a disturbing tendency of farmers to stay on the farm. Also: the complexity of regionalization in India is a big reason why the future economic growth of the country is so tough to call.
Brazil: Brazilian growth rates have oscillated around an average of 2.5 % since the early 1980’s, spiking only in concert with increased prices for Brazil’s key commodity exports. “This is not the profile of a rising economic power”. Brazil is still one of the most closed economies in the emerging world–total imports and exports account for only 15% of GDP. Brazil’s tax burden, at 38% of GDP, is similar to established European welfare states such as France and Norway. When a relatively poor country like Brazil taxes this much, it means its businesses don’t have the money to invest in new technology or training. Finally, infrastructure is famously poor. The cost of capital with high interest rates makes it very difficult to build anything quickly. On a positive note, the high cost of borrowing (and everything else) has made public companies highly disciplined. As a result, they are highly profitable which should be good for the Brazilian stock market again.
Canada: The Canadian economy is one of the largest and most highly developed market economies in the world. With the majority of Canadian people constantly investing in the stock market, Canada’s stock market has begun to strengthen. With multiple opportunities for people to buy stocks, Canada’s stock market seems to be one of the best places to invest lately.
Russia: Poor leadership, institutionalized corruption and reliance on one main commodity (Oil), make the country an extremely risky investment. To regain its momentum, Russia needs a new non-oil economic model and a new non-Czarist mindset.
Mexico: Oligarch and Tycoon economy. Because they control everything, the tycoons can extract premium pricing, which create huge profits and a stock market that went up 200% more than the US’s S&P 500–even with about the same growth levels as the United States. The manufacturing sector and proximity to the US’s more stable and slowly improving economy is also a plus. Overall, Mexico should see a bit better than average growth, even with it’s awful security and drug business problem.
South Korea: “The Gold Medalist”. Samsung, Hyundai and LG are world-beaters. They have taken Japan’s place as the world’s best manufacturers. In addition, the KOSPI is a highly efficient stock exchange with foreigners owning more than 1/3 of listed stocks. Finally, Sharma believes that it’s just a matter of time before the two Koreas unify, which will create an even larger and more dynamic economy.
Taiwan: Solid but doesn’t have great global brands like Korea and , therefore, doesn’t have a major stock market.
Poland and The Czech Republic: “The Sweet Spot of Europe”
Turkey: Great leadership in Recep Tayyip Erdogan, who continues to build out the rest of primarily Muslim Anatolia in addition to the traditionally strong Istanbul-Ankara-Izmir triangle. As a result, business is booming in the Middle East along with Europe and the Caucuses.
Indonesia: Very bullish; investment as a share of GDP is 32%. What Indonesia has not reinvested, it has saved by paying down public debt, which has fallen from 97% of GDP to 27% now.
Phillipines: Improving; good current leadership under Aquino III and a well-educated English-speaking population which is challenging India for BPO ( Business Process Outsourcing) supremacy.
Malaysia and Thailand: not as good; leadership and societal unrest problems, but still have great potential.
The Fourth World: The are countries that have better growth potential, but also much greater risk than their emerging counterparts preceded here. Some countries that have a better shot than the others include Sri Lanka because of its peace dividend, Nigeria with its current, at least, solid leadership, Uganda, Mozambique and yes, Iraq. He’s bearish on Vietnam due to poor economic leadership, very poor investment and infrastructure; believes it’s been overhyped.
Sharma calls the Gulf countries “a world unto itself”. Petrodollars are keeping autocratic rulers in power, but to their credit, they are investing into education and health, and working hard, if not effectively, to improve the future. They just have so much wealth. Estimates put the total financial wealth in the region at over $3 trillion, which is compounding at over 20% a year as oil revenues continue to spill over! The problems will eventually surface when the petrodollars start to run out. The only country where this won’t be a problem has the world’s highest income at $100, 000 per person: Qatar. Says Sharma, “Qatar is unique, a world unto itself, hidden within a world to itself”.
Finally, all of this coming change, particularly the commodity bust, will encourage the revival of the West. Investment in alternative energy use and vehicles will pay off, as will less dependence on foreign oil, particularly for the U.S. In addition, the maturation of the fully wired and mobile economy, the dream of the 1990s, is becoming a reality, and American companies are at the forefront of making it work. Software is finally reaching critical mass, spreading to new industries such as defense, agriculture, education. “All the hottest new things, from tablet PCs to cloud computing to social networking, are emerging largely from the United States. America is the leader in Internet search, in business networking, in online commerce. All of these services are attracting millions of users, revolutionizing the way we interact with the Web–and one another. These Web services find their commonality in their US origins, even if final demand is increasingly from emerging markets. This is likely to keep the United States well up to speed in the global growth game”.