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Emerging Markets Take Centre Stage: A Dramatic Shift in Purchasing Power
Business Monitor International, Feb 2010, Pages: 58
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.
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