EMERGING MARKET GDP GROWTH: THE PAST TWO DECADES, AND OUR PROJECTIONS FOR THE NEXT DECADE
According to the IMF, World Bank, and the United Nations’ historical data, GDP growth rates have varied widely for emerging markets over the last fifty years. We will focus on the past twenty years from 1990 to the present so that we may draw conclusions to help us project future growth in the developing world. Once we are able to make an educated guess of the GDP growth, we will be able to compare it to the more thoroughly analyzed and widely predicted growth expected for the developed world.
In the 1990’s, we saw a secular decline in demand for oil and commodity prices that caused oil-producing developing nations to slow their growth. For example, Russia fell from 12% of total emerging market GDP in 1990 to only 3.3% in 2000 (source: Jonathan Anderson chief emerging market economist at UBS – see chart below). By the year 2000, the best GDP growth was found in China, Brazil, Mexico, India, Korea, Taiwan, Argentina, Hong Kong and Indonesia. China, after two difficult decades, had once again returned to the top of the rankings.
Between the year 2000 and the present, emerging markets were dominated by the fast growth of China, which greatly increased its share of emerging market GDP from 15% to 24%. India, Indonesia, Brazil, Turkey, Russia, and Korea grew nicely, although at a slower rate.
WHICH WILL BE THE WORLD’S BEST GROWTH AREAS OVER THE NEXT 10 YEARS?
We have analyzed and handicapped the growth derby over the next ten years. We project that India, Indonesia, and China will lead the pack with Brazil, Singapore, Taiwan and Korea also doing well. There are some surprises here.
How about Latin America (excluding Brazil)? Mexico has problems with drug cartels and the decline of their oil production, while Argentina is gripped by poor economic policies from the Kirchner / Fernandez leadership. These such problems make growth in these countries more difficult to achieve. On the surface, Venezuela looks as though it could be another potentially strong performer. Yet unfortunately, this resource-rich country is suffering from self-destructive politics and the continuation of class warfare which is serving neither the rich nor the poor. Thus, we expect that Brazil will be the only standout growth performer in Latin America.
Within Eastern Europe, unstable government finances are an unwelcome legacy of the communist years, along with an unrealistic work ethic that hobbles growth rates in many nations. Turkey may be an exception.
Within Asia there are many potential growth countries, but they will need to work out political conflicts, class conflicts and entrenched corruption to start their growth engines. We wish them all well, but we endorse only those countries mentioned above.
In summary, we see India, China, Indonesia, Korea, Singapore, Brazil, Taiwan, and Turkey in the top rank of GDP growth over the next ten years. In our opinion, these economies will grow from 5% to 10% for the next decade. India, China and Indonesia should experience the fastest growth.
How about the second rank? Here we see Germany, Switzerland, Canada, Norway, Australia and Saudi Arabia. Growth for this group will be respectable, but will not exceed 3% to 4% per annum over the decade. At the bottom rank of GDP growth we see the developed world – especially Europe (except Germany), Japan and the U.S. We are very concerned about the European community in general, and to a lesser degree about the U.S. and Japan. In these regions, deflationary trends may be establishing themselves. In these regions the voting public has indicated that they want a government hand out, but are unwilling to accept taxes to pay for the handout. Further we are concerned that the political forces in these nations may not understand the fragile nature of their economic systems, and the need to balance cost cutting with monetary policy to insure that deflation does not develop.
Should a stagnating economy combined with a deflation develop in these nations, we expect a panic by the local politicians which would turn the situation into an inflationary stagnation, or worse, and inflationary depression.
This is a combustible and unstable formula which will lead to relative decline in the power of all countries in this category.
As investors, it is in our best interest to focus investments where the well-managed, stable, growth-oriented investments can be found.
IF CHINA’S GDP IS GROWING SO FAST, WHY HAS THE CHINESE MARKET FALLEN IN 2010?
It is true that China is inexpensive on most—if not all—measures of stock market value. P/E ratios, price to book, and other analytical parameters of value are telling investors that the Chinese market is cheap. It is also true that the Chinese market has fallen by about 25% in 2010. Why? One negative is large overhanging public offerings of very large banks which have threatened to soak up some of the current stock market capital in Shanghai and Hong Kong. A second is fear of over-vigorous government intervention in the construction and housing sectors in China. A third is a vague and unfocused fear of a removal of government stimulus throughout China.
Many Chinese banks and other state-owned enterprises are raising money through the Hong Kong and Chinese equity markets. This huge funding demand is creating a stock supply glut which will last until the banks finish their multi-billion dollar equity offerings. We anticipate that this will occur within a couple of months. After that time investors will once again start to focus on the obvious reality that Chinese stocks sell at very low valuations and could rise substantially once investors focus returns to the fundamentals of corporate profit growth.
We do not believe that the government-induced slowdown in construction or a removal of stimulus is enough to slow Chinese GDP growth to unacceptably low levels. China experienced GDP growth of 9.1% in the difficult year of 2009. GIM anticipates Chinese GDP growth of about the same rate in 2010. Even with a slowdown in growth in the fourth quarter of 2010, we anticipate Chinese GDP growth by over 10% in 2011.
Problems in the world are many, and we are made aware of a litany of them every time we open a newspaper. Here at GIM, we open many papers every day. Even with all the problems currently experienced in Japan, Europe, and the U.S., some parts of the world continue to grow vigorously.
Our focus will be on the countries above which have strong prospects for growth. We will also focus on high yielding income stocks which earn cash flows from the production of oil, and from gold, which we believe will provide an anchor to windward in the current turbulent economic times. Caveat: We prefer to buy all investments during periods of price weakness and we believe that the volatile nature of today’s markets will continue to produce those opportunities if we remain patient.
WE WOULD LIKE TO INTRODUCE THE PROFESSIONALS DEDICATED TO SERVING OUR CLIENTS
This is a service business, and we always encourage our clients and readers to feel free to contact us or our staff to answer questions. In addition to contacting Monty or Tony with your questions about the markets, we want you to feel confident that our client relations professionals will endeavor to handle all your needs.
Tim Shirata – Tim, our Director of Operations since 2007, can assist clients and prospective clients in many areas, such as new accounts, custodial questions, cash flow needs, website feedback, commentary circulation, etc.
Aubrey Ford – Aubrey has been with Guild since 2008. Aubrey excels at helping existing clients and prospective clients with their questions about our portfolio management services. As our Director of Marketing and Client Relations, Aubrey will ensure that your needs are handled in a timely manner.
Ari Cohn – We are very pleased to announce the hiring of a new member to our team. Ari joins Guild after spending the past few years working with a Los Angeles based investment management servicing company and completing his MBA from Pepperdine University. Ari is eager to help you with your investment portfolio account inquiries. Feel free to give him a call anytime to introduce yourself.
Barbara Reams – Barbara has been with Guild since 2006 and is available to assist with client inquiries, information changes, and will see that concerns and issues are directed to the appropriate team member.
Bronwyn Guild – Bronwyn is available to assist with client inquiries, information changes, and will see that concerns and issues are directed to the appropriate team member.
Thanks for listening.
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