As recently as 2007, China’s economy was growing at a 14.2% rate. India’s was expanding by 10.1%, Russia’s by 8.5% and Brazil’s by 6.1%. This year, developing economies as a group will be lucky to grow 5% according to a recently released World Bank report. The causes of this slowdown range from a tightening of credit in China to political turmoil in the Middle East.
Research by Ruchir Sharma of Morgan Stanley suggests that sustaining high levels of economic growth is a tall order for any emerging economy. Since 1950, only one third of developing countries were able to sustain a 5% annual growth rate for at least a decade. Less than one fourth grew that fast for two decades and one-tenth for three decades.
This latest slowdown has a number of economists rethinking the future of emerging markets. The long-held assumption that Brazil, Russia, India and China (the BRICs) are destined for sustained economic outperformance is evolving into a more nuanced view. Much of their gains were historically fueled by two factors; growing ranks of low cost labor and rising prices for a wide range of commodities. While these factors will continue to benefit individual countries, their impact is unlikely to be as broad based and pronounced going forward. Consider that Chinese manufacturer Haier’s in-country wages are now 25% of American levels, up from just 5% in 2000. Commodity price spikes too will come and go but are unlikely to be as extreme as those fueled by robust Chinese demand earlier this century.
Investors must adjust to evolving conditions in emerging markets. While rising wages are putting a crimp on export-oriented economies such as China, income growth is fueling middle class consumption of a wide range of products and services. Global companies and increasingly home-grown companies that are well positioned to serve these consumers will prosper. Consider UK-based Vodafone. This leading telecom operator operates M-Pesa, a mobile banking application that allows users to store cash on their phones, shop and pay bills. In Kenya, the company’s Safari.com subsidiary handles the equivalent of one-third of the country’s GDP each month in text messaged cash. Vodafone has introduced the service in India where more than 600 million consumers lack access to basic financial services and the company is making plans to launch the service in Europe as well.
As traditional avenues for growth have slowed and international competition has heated up, many emerging market firms are stepping up their game, investing in innovation and attacking new markets. Mindray, a Chinese supplier of medical equipment, is having good success introducing lower cost versions of their products both at home and abroad.
As the chart below shows, investors have a long history of bailing out of emerging markets at just the wrong time. The shares, having underperformed their U.S. counterparts for much of the last five years, are now attractively priced.
