Emerging Markets Take Centre Stage: A Dramatic Shift in Purchasing Power

Emerging markets are set to outperform developed states in 2010 and beyond. BMI forecasts that by 2018 EM GDP will equate to around 50% of global GDP.

After years of progress on regulatory reform, macroeconomic restructuring and institutional convergence following the painful events of the Asian and Russian crises of 1997/98 and the Argentine debt default of 2001, emerging markets (EM) are, for the most part, far healthier than ever before. As a result, their ability to withstand the global credit crunch and ensuing global recession, compared with their developed world counterparts, bodes well for EM macroeconomic out performance, not just in 2010 but over the coming decade.

The superior fiscal outlook for EM states also underpins our view of long-term growth out performance, especially as government revenues will be able to focus more on investment than paying back debt. In fact, by 2018, we expect EM GDP, in US$ terms, to equal developed world GDP, and therefore equate to around 50% of global GDP, up from roughly 35% today, with BRIC countries all in the top 6 in the world on a US$ GDP basis. The result will be a major rise in levels of GDP per capita in the developing world. The accompanying table shows that by 2018 the spending power of China, India and Russia will have increased threefold since 2008, in US$ terms, and nearly so for Brazil. This is a significant out performance versus developed market counterparts, for whom the increases in GDP per capita are not nearly so dynamic. In this respect, Australia and the US manage an increase of 43% and 36% respectively, whereas Canada and the UK see gains of 23% and 22%, while most of Western Europe registers a dismal rise of under 10% over the forecast period.

This increase in EM income per capita will have enormous implications for asset allocation. The higher growth environment, and by consequence, the higher return incentives of EM will become increasingly difficult to ignore for global investors, leading to a strong flow of capital from developed to EM. This plays up the point that the global recession has accentuated the relative value potential in EM over the developed world, by highlighting the unsustainable Western European and American imbalances while also indicating the relative robustness of many emerging markets. This report focuses on the relative value opportunities in EM by analysing and forecasting the outlook for the key EM regions, detailing too the key economic and political risks that will pose headwinds to the ‘EM story’.

The report also highlights the dramatic implications for a host of business sectors around the world, ranging from financial services, to consumer goods, to service sector industries to infrastructure and freight transport. We point out which industries are best placed on a relative basis to benefit over the coming decade.

Indeed, the global recession in 2009 – and recovery in 2010 – will see marked differences between industries. The Infrastructure industry has been the most resilient globally, although Pharmaceuticals demand has been the most stable in developed states, with Telecoms enjoying this distinction in EM. Of those industries that suffered sharp downturns in 2009, the core consumer-oriented industries of Retail and Food & Drink will bounce back solidly in 2010, although their performance (in terms of annualised growth) will be eclipsed by the Autos industry. Other sectors, notably Banking, IT and Tourism, will see a delayed recovery. Thus, while the global bust may have been synchronised across sectors, the industry landscape has firmly decoupled, with industry-specific recovery rates increasingly accompanied by differentiation between regions within industries.

Executive Summary
EM To Outperform
TABLE: Top 20 States By Share Of Global GDP In 2018

2010 Global Outlook
EM Leads The Way
chart: The Dow Is Stil Importa nt
Bovespa to Dow Ratio
table : Emerging Market Regional Real GDP Growth Forecasts , 2008-2019chart: EM Becomes More Fiscaly Responsible
G7 and BRIC Fiscal Balance, % GDP
chart: The Growing Importa nce of EM
EM + Developed Mkt GDP, US$mn & EM GDP, % Of Global Total
TABLE: Top 20 States By Share Of Global GDP In 20181
TABLE: Developed Market and Emerging Market GDP 2004-2013
Key Risks

Global Market Views
Ten Themes For 2010
1) Deflation in the West; Inflation in EM
chart: Emerging Markets Lead The Wa y
Real GDP Growth (% chg y-o-y)
2) Chinese-led Asian Outperformance (with double-dip risks)
3) A US double-dip, of sorts
4) More stimulus to come
5) Monetary policy to normalise, but not tighten much
6) Eurozone will be an economic house divided
7) Higher asset prices, weaker dollar v EM
8) Major correction risks from complacency
9) Commodities to remain elevated
10) Government policy risks (protectionism, food tariffs)
Financial Markets Implications – The Technical Take
The Commodities Conundrum

Global Assumptions – 2010
Global Outlook: 2010 Looking Rosier
TABLE: GLOBAL & REGIONAL REAL GDP GROWTH
TABLE: GLOBAL ASSUMPTIONS
Table: Developed Market Exchange Rates
Table: Emerging Market Exchange Rates

Developed States
TABLE: DEVELOPED STATES

Emerging Markets
TABLE: EMERGING MARKETS
US Economy
Rebound To Fade By 2011
chart: Not Quite A ‘W’
US – Real GDP Growth (% chg y-o-y)
chart: Signs Of Life For Inventories And Housing
US – Contributions To GDP (percentage points)
More ‘Help’ From Washington?
Fed Will Be Reluctant To Tighten
table : UNITED STATES – GDP CONTRIBUTION TO GROWTH

Emerging Markets Outlook

Asia
A Cracking H209... Now Comes The Hard Part
How Sustainable Is Asia's Improving Macro Story?
chart: A Quite Remarkable Recovery
Asia Industrial Production & Selected Indicators, % chg y-o-y
chart: Mind The Dip
Global Real GDP Growth, %
chart: Consolidation Harder Than Stimulation
Asia – Average Nominal & Primary Fiscal Balance, % of GDP
Final Remarks

Europe
Q3 Growth: H1 Trough View Plays Out
Relative Value Positioning Still On
chart: Where To For CEE?
Emerging Europe – Real GDP Growth
The ‘Square Root’ Shaped Recovery
chart: Strong Bounce Reflects Stabilisati on Of Credit Markets
Emerging Europe – MSCI Eastern Europe Equity Index
table : EMERGING EUROPE GROW TH, % Y-O-Y

Latin America
Freer Trade Will Have To Wait
map: Closely Gua rded Borders
Latin America – Mercosur Memberstates
chart: Everybody Neds Good Neighbours
Argentina – Mercosur Trade As % Of Total
chart: Dependence On The Up
Uruguay – Mercosur Trade As % Of Total
No Sign Of EU Deal
chart: Sta nding On Its Own Two Fet
Brazil – Mercosur Trade As % Of Total
In The Shadow Of Politics


Middle East
Abu Dhabi Funds Save Dubai From Default
chart: Phew!
Dubai Financial Markets General Index
Last Minute Bailout
chart: Back On Track?
Abu Dhabi Index
Structural Change Across The Board
Credit Fears Sta rt To Ease Dubai 5-year CDS Spread (bps)

Sub-Saharan Africa
V-Shaped Recovery In Store For 2010
chart: Recovery In Motion
South Africa, Nigeria & Kenya – Real GDP Growth, q-o-q, %
Accommodative Fiscal & Monetary Policy
table : Sub-Saharan Africa: Policy Interest Rates
Investment: Edging Onto The Radar
table : Real GDP Growth, %
Risks To Outlook

Commodities
Why Agriculture Will Outperform In 2010
chart: Agriculture To Outperform
S&P Goldman Sachs Commodities Indices

Global
What Could Go Wrong?
chart: Inventory Re-Stocking To Boost US 2010 Growth
Inventories Contribution To US Real GDP Growth, %
chart: The Convergence Story
EM and Developed World GDP, US$bn
How Does EM Fit In?
chart: Spotting An Opportunity
BMI’S EM Investment Checklist
What Would A Dollar Comeback Mean For EM FX?
chart: Dollar Revival
Exchange Rate – US$/EUR

Global Political Outlook
What To Expect In 2010-2019
Table: Countries Facing Major Leadership Succesion In 2010-2019
Countries Facing Uncertain Leadership Successions
Countries At Risk Of Major Political Upheaval
Table: Countries At Risk Of Major Political Upheaval
Scenarios For Unrest In China
Countries At Risk Of Interstate Conflict
Table: Countries At Risk Of Interstate Conflict Or Heightened Bilateral Tensions
Countries Vulnerable To Separatism, Insurgencies Or Civil Wars
‘Pivotal States’ To Watch
Table: Countries Facing Secesionist Or Autonomy Movements , Insurgencies, Or Civil Wars
Possible Wild Cards In 2010-2019
New 9/11-Scale (Or Greater) Terror Attack
Table: Pivotal States
Western Failure To Win Decisively In Afghanistan/ Iraq
Renewed Ideological Divide
Global Pandemic
Major Cyber-Attack
Climate Change-Related Incidents

2010: The Industry Outlook
Industry View
The Impact of Global Imbalances
State Support
Commodities Boom?
The Risks

Industry On The Ground
Industry View
table : CIR – China
table : CIR – Russia
Country Differentiation
table : CIR – USA
table : CIR – E7 & G7
Industry Resilience
table : Infrastructure CIR – E7 & G7
Pro-Cyclical Industries
table : Food & Drink CIR – E7 & G7
Lagging Industries
Conclusion
table : Banking CIR – E7 & G7
table : CIR – BRAZIL
table : CIR – INDIA
table : CIR – USA
table : CIR – UK
table : CIR – RUSSIA
table : CIR – CHINA
table : CIR – JAPAN
table : INFRASTRUCTURE CIR – E7 & G7
table : TELECOMS CIR – E7 & G7
table : AUTOS CIR – E7 & G7
table : BANKING CIR – E7 & G7
table : FO D & DRINK CIR – E7 & G7

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