August 6th, 2017
Via Frontera, a graphical look at how emerging markets will dominate the world’s largest economies by 2050:
This rally in emerging markets stocks and bonds has given rise to worries that the rally may be over and markets may go downhill from here.
But if we look beyond the cyclicality of financial markets, emerging markets are creating a much bigger playing field for themselves.
Changing global economic order
The graph above has been reproduced from PwC’s ‘The World in 2050: How will the global economic order change?’ report released earlier this year.
The report noted that E7 countries (China, India, Brazil, Russia, Indonesia, Mexico, and Turkey) were half the size of G7 countries (US, Japan, Germany, United Kingdom, France, Italy, and Canada) in 1995 when measured in PPP (purchasing power parity) terms. The firm expects the E7 and G7 relationship to reverse by 2040.
China and India are leading the charge for emerging economies. While China is already the largest economy in the world in PPP terms, it is expected to overtake the US in MER (market exchange rate) terms as well by 2030. It is also anticipated that India will take over the US as the world’s second largest economy in PPP terms by 2050.
Balance of power shifting?
The graph above, also taken from the same report, shows how the balance of economic power is shifting east, specifically towards Asia.
PwC expects the economies of Brazil and Mexico to overtake Japan in PPP terms by 2050. While China’s economic output could be a fifth of the global output by that year, India’s output could be 15%; the US would then be third with 12% of the global output.
These changes, if they come about, would be a tectonic shift in economic prowess, which is bound to have an impact on investment. On one hand, this change reflects a possible decline in opportunities in the developed world of today, but on the other, it heralds a new world with new prospects for investment.
Why Emerging Markets Dominating the Global Economic Landscape Maybe a Good Thing
Markets and economies go through cycles with the former sometimes being indicative of the health of the latter. A similar cycle, albeit with a much slower change of pace than markets or economic cycles, is turning a corner in favor of emerging markets.
This graph has been reproduced from PwC’s ‘The World in 2050: How will the global economic order change?’ report released earlier this year. It shows how major emerging markets will displace the developed economies of today overtake most of the current top 10 nations by the value of economic output.
Mexico, which is not part of the top 10 today, has displaced France from the list in 2050. Meanwhile, India has displaced the US, Indonesia has climbed four spots, while Japan and Germany are relegated by four ranks.
Though this change of economic order may look like a disadvantage for advanced economies of today, it can actually be an opportunity for businesses in these nations.
New markets, higher incomes, burgeoning middle class
Continual change in the global economic landscape is not unexpected as it is quite natural for developing economies of today to challenge their advanced peers tomorrow.
Bigger emerging economies implies an increase in average income levels. A graph pertaining to expected increase in average income levels, taken from the PwC report, is presented below.
Though average incomes in emerging markets are predicted to be lower than their developed market peers even by 2050, in comparison to their present levels, the estimated figures are significantly higher, especially in countries like India, Indonesia, and China.
This translates to many more people joining the middle class in the coming 30 years. With fast growing economies and higher disposable income, this segment presents major opportunities for domestic as well as overseas companies which’ll have a large enough consumer base to cater to even if regulations favor home-grown players.
So even though in terms of economic size, developing economies may have to make room for their emerging market peers in the next three decades, corporations and their stocks from those countries will remain in play.
As far as emerging economies are concerned, this kind of growth is highly dependent upon policy. Opening of markets and currencies with favorable regulation which fosters healthy competition would be necessary for even domestic companies to do well, let alone foreign entrants.
How Emerging Asia May Be Providing Unmatched Investment Opportunities
If emerging economies grow as projected by PwC in its ‘The World in 2050: How will the global economic order change?’ report, then it is safe to assume that emerging markets will soon form a much bigger allocation of your stock portfolio than they do today.
Related Article Coal Uprisings Expose Myanmar’s Energy DilemmaBut even among the diverse universe of emerging markets, there are certain countries which surface as clear leaders. Regionally speaking, Emerging Asia has been leading developing countries from the continent both in terms of economic size and growth and stock market performance.
The graph, reproduced from the aforementioned PwC report, shows that apart from PPP (purchasing power parity) terms, emerging countries will likely be significantly bigger than their developed peers even in MER (market exchange rate) terms by 2050.
This can be made possible by two Asian giants: China and India.
The E7 in the graph refers to China, India, Brazil, Russia, Indonesia, Mexico, and Turkey while G7 includes the US, Japan, Germany, United Kingdom, France, Italy, and Canada.
This rise in economic growth not only implies more consumers, as we had seen in the previous article, but also larger and a higher number of domestic companies which will help in increasing output and employment.
This means firms which are currently publicly listed can become much bigger and several other firms from Emerging Asia can tap the stock market going forward, automatically increasing their weight in your emerging markets portfolio.
Keeping an eye on Emerging Asia stocks
Stocks from Emerging Asia, especially India and China, have already had a sizable impact on emerging market equity performance this year.
The graph above plots the performance of the following six ETFs:
- Vanguard FTSE Emerging Markets ETF (VWO)
- iShares MSCI Emerging Markets ETF (EEM)
- iShares Asia 50 ETF (AIA)
- iShares MSCI Emerging Markets Asia ETF (EEMA)
- First Trust Chindia ETF (FNI)
- SPDR S&P Emerging Asia Pacific ETF (GMF)
Though the broad-based emerging markets funds have done very well this year, the ones investing in Asia in general and China and India in particular, have overshadowed them.
But apart from economic growth and higher consumption, there are other areas in which emerging markets may eventually come to dominate their developed market peers.
Emerging Markets: Leading the World with Responsibility
In this series, we’ve seen how emerging markets can become dominant forces in the global economic order going forward, in turn, impacting your investing in the asset class.
But economic growth on that scale would require a boost to local businesses.
This is what a McKinsey report predicts.
The graph, reproduced from a McKinsey Global Institute report, estimates that a little less than half of Fortune Global 500 companies will call an emerging market country their home by 2025, compared to 24 in 2000.
Interestingly, there were 23 companies from emerging markets forming part of the list in 1980. This means that only one more company from the segment was able to make it to the rankings in 20 years. From that pace to what the firm projects for 2025, the rate of growth looks phenomenal.
This is similar to the representation of emerging markets equities in the global market cap.
According to MSCI classification and analysis, stocks from emerging markets across 10 countries used to form less than 1% of global market cap when the Emerging Markets Index was launched in 1988. At present, the Index comprises of stocks from 24 countries and represents 10% of global market cap.
Taking responsibility
The graph below has been reproduced from the ‘Global Trends in Renewable Energy Investment 2017’ report. The publication is commissioned by the UN Environment’s Economy Division in cooperation with Frankfurt School-UNEP Collaborating Centre for Climate & Sustainable Energy Finance.
In 2015, developing economies had ‘spectacularly’ overtaken their developed peers in total investment in renewable energy. However, they gave up that lead last year as China’s investment plunged 32% from 2015 to $78.3 billion – the first decline in 12 years.
India – one of the ‘big three’ along with China and Brazil – remained firm on its investment at $9.7 billion last year while Jordan saw its investment zooming by 148% from a year ago. However, some other emerging economies, like Mexico, Chile, Uruguay, South Africa, and Morocco saw their investments decline by over 60% each from the preceding year.
This decline was primarily attributed to “a mixture of scheduled pauses and delays with auction programs and financings.”
But overall, it would not be incorrect to say that developing countries are looking at this sector seriously.
Not only does this display their responsibility towards an energy secure future which reduces the depletion of natural resources, it also presents an investment opportunity for investors interested in the sector.
Bottlenecks like those outlined above, which led to a decline in investment in 2016 are certainly hiccups, but are unlikely to be true roadblocks in a segment in which developing economies are putting sizable financial resources.
Focusing primarily on The New Seven Sisters - the largely state owned petroleum companies from the emerging world that have become key players in the oil & gas industry as identified by Carola Hoyos, Chief Energy Correspondent for The Financial Times - but spanning other nascent opportunities around the globe that may hold potential in the years ahead, Wildcats & Black Sheep is a place for the adventurous to contemplate & evaluate the emerging markets of tomorrow.