Evolution of the next 11 economies.
Just like the list of medal winners at this years Olympics will feature more nations than before; so it seems economic development will also feature a change in gross domestic product (GDP) rankings over the next 10 to 50 years. If we only knew which economies would launch the quickest surge, perhaps we could make money and balance our portfolios accordingly?
Enter Ashok Bhundia; executive director at Goldman Sachs, speaking in a Momentum-sponsored conference for IFA's in Cape Town last week.
For Bhundia, the period of G7 dominance being upstaged by the BRIC nations (Brazil, Russia India and China) climb up the GDP medal table is upon us. "The BRICs have already had a major impact on global trends: on growth, on commodity prices and on consumer spending. This will continue to grow over time," says Bhundia.
But this isn't the big news, as these nations have been hitting headlines and making their impact in ever-increasing ripples for at least five years. The "hang-on-a-minute" comment from Bhundia that really makes the news was his expectation that it will be the "N11 - the next 11 countries" that will more completely demonstrate the effects of a globalised economy. "The N11 economies have the potential to achieve the same impact as the BRIC economies," says Bhundia.
So who are these guys, and where will the impact be felt? In alphabetical order, Bhundia's N11 are: Bangladesh, Egypt, Indonesia, Iran, Korea, Mexico, Nigeria, Pakistan, Philippines, Turkey and Vietnam. The Koreans might feel a bit slighted by being currently grouped in this "third division" when their income per head statistics (for example) turns the N11 average from $2,357 per head (N11 ex-Korea) to $3,069 per head with Korea.
Macroeconomically, it seems more like a list of populous countries, which it is. The emergence of N11 assumes that globalisation will provide the back-drop against which people become the number one raw material to driving GDP; making the challenges for government: firstly, how to get the best out of the labour pool; secondly, keeping investment rates competitively high; and thirdly, ensuring that the domestic economies are focused on "productivity catch-up". I think we can safely assume that not all the N11 will get all of that right at the same time.
So, what sort of impact is Bhundia expecting from the N11's? One insight might be to look at the GDP medal table today and the Goldman's view of tomorrow. The following tables capture Bhundia's view of GDP rankings:
In short, the Goldman's expectation, seemingly mirroring the thoughts of many economists, is that human demographics will become an increasing determinant on international economic wealth. If correct, the need to work in economic blocs for smaller countries, and even "declining" ones like Britain, Germany, France and Italy, might become more important.
However, the changes anticipated are based over between one generation and say three. The Olympic medal swing from the US and Eastern Europe to China and elsewhere seems to have been a little quicker. One of the reasons might be the sluggish change in income per capita in BRIC and the emerging markets generally. Though the BRIC nations are currently major drivers of global growth and spending, this is not being translated (yet) into wealth-spreading.
The top-earners table now reads as: UK (say $58,000 per head per annum), followed by the US, France, Spain, Germany, Italy, Canada and Japan (say $43,000 per annum). Thereafter, there is a sharp fall to Korea and "the others" leaving, average income per head in BRIC at $2,359 per head (up from $905 in 1995); and $2,357 in N11 ex-Korea.
Nevertheless, for industries connected to consumer well-being, Bhundia alludes to the expectation that an enormous income pool will emerge in the BRIC nations (and eventually in the N11 economies). By 2025, Goldman estimates that BRIC nations will have a pool of over 200 to 250 million people with incomes over $15,000 per annum. This is higher than the populations of Japan, Germany, UK, France and Italy!
The overall sentiment of Bhundia's presentation was one that clearly supports the idea that the emerging economies will remain significant drivers of the overall global economy. Whether it is in the form of the rise of the BRIC economies or the emergence of the N11 countries. They will remain significant drivers of key areas of infrastructural development through the power of consumption in industries as varied as providing airline passengers, using mobiles, the internet and the "hard" infrastructural needs of roads, schools and hospitals.
Yet, whilst Bhundia also acknowledges the "challenges" represented by higher inflation, they are a far more robust proposition than they have ever been before. Macro-economic performance is stronger, inflation has been generally kept under control, foreign exchange reserves are stronger than ever and leading emerging market economies are exposed to far less balancesheet vulnerability.
Ultimately, emerging markets are finding their way into all manner of portfolios. The trick is to find the ones with the greatest probability of working their way from micro-local powerhouse to the macro-global powerhouse over your investment lifetime.
The writer is Chairman of Mondial Financial Partners.
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