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WHAT IS GROWTH POTENTIAL?

In 2006, Martin Wolf wrote in the FT that the world economy is undergoing a revolution – that remains the case, and will do so for many years to come. 

Here are some of the key facts illustrating the considerable potential in the many years ahead:

• Emerging markets accounted for 50% of world growth in 2005, a significant landmark. Moreover, they have been driving global growth, including that in developed economies. .
• This is no short term trend. As these Emergers continue to integrate with the rest of the world, it will “provide the biggest boost to the world economy since the Industrial Revolution” (Economist, 16/9/06). Where the industrial revolution impacted on one third of the world, the impact of emerging markets affects the whole planet – both now, and into the future.
• For example, there are 5.5 billion people populating the emerging economies, and they already account for more than half the world’s total energy consumption. Yet this is early days - oil consumption per head in China is one-third of that in the US, and India’s one-third of China’s. It is estimated that China’s oil consumption could increase tenfold in the next three decades.
• McKinsey estimate that from now to 2015 consumers’ spending power in emerging economies will increase from $4 trillion to more than $9 trillion, that increase alone being equivalent to the entire spending power of the Western Europe!
• In 2010 China is expected to create 800,000 graduate engineers, mathematicians, technicians and scientists, while India will likely create 600,000. That combined pool will be 12 times the output of US universities for the same disciplines. Doubts have been raised about the quality of this graduate output - but if this can be improved there is a fantastic talent pool, that can (will?) take the world by storm.
• The IMF estimates that in the next 5 years emerging economies will grow at an average of 6.8% per annum, compared with only 2.7% for developed economies. As labour costs can vary from $1 per hour in China to $4-5 in Eastern Europe and an average of $20-25 in the US, is it any wonder that emerging markets will have a global competitive advantage for a long time to come?

With all of this good news it is perhaps surprising that emerging Stock Markets have not risen higher in recent years. It could be that in a post-9/11 world investors are still focused on global fragility, and see the cup as half empty rather than half full.  Despite the potential the FTSE Emerging Markets index (which represents all emerging stockmarkets) is only 11% of the FTSE All-World Index.

To put all of this in context, Barings forecast returns of 11-12% per annum from emerging markets over the next decade, compared to 7-7.5% from the stockmarkets of developed economies.  Our sense is that the gap between developed and developing worlds will be greater than this.

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