May 06, 2012
Topics: Emerging Markets
There is no secret that China and other emerging economies have been growing rapidly. But this latest growth story in emerging economies is more than just a temporary investment opportunity. It is a paradigm shift and we appear to be witnessing the rise of the east and the slow decline of the west.
Many emerging markets such as China and India may be far off when it comes to GDP per capita, but in terms of the share of global GDP they are closing in quickly. During the 1980âs and the 1990âs the United States and Japan were unquestionably the two largest economies in the world. Then came China and surpassed Japan in the early 2000âs. But the United States was still unrivaled in terms of economic might, and economists in the early 2000âs claimed that the US would remain the largest economy until at least 2030. But a lot has changed since the great recession of 2008 and according to recent data from the IMF China is estimated to surpass the United States as early as 2016. The chart also shows India passing Japan. Even economic power houses such Germany is losing ground against the rising economies of the east.
Graph provided by courtesy of Niall Ferguson
A major problem is that the west is no longer competitive in many areas. There are simply too many regulations and too much debt stifling growth. It is not just the cheap labor that makes emerging economies more competitive but they are not subject to all the burdensome regulations and high taxes that are restraining growth in the west. In addition, people from many of these emerging economies have been suffering from decades of poverty and tyrannical rule. As their countries finally start to open up they are eager to work hard and get ahead. They are tired of war and starvation and they have a burning desire to get ahead in life, save their capital and raise their standard of living.
Contrary to western economies the latest data show the rise in personal income in emerging markets that comes with an expanding economy. The great recession in the United States and Western Europe put a hold on income growth and what we have seen so far is a jobless and âwagelessâ recovery.
There may still be a great gap between western developed nations and emerging economies but this gap is slowly shrinking. Wages in the developed world are either flat or falling while wages are quickly rising in emerging economies. The chart below shows the contrast between income growth among developed nations and emerging economies.
The next chart is a color coded map showing which countries were hit hardest by the economic crisis of 2008/2009. The chart measures the GDP growth in 2009. Most emerging economies were still green while virtually all western nations were in recession.
As this trend continues it becomes ever more important to allocate a larger share of your portfolio to markets where real growth can be found. China, Brazil and India has been the focus of the media but other less explored markets such as Mongolia, Vietnam, Laos, Columbia and Nigeria are at a place where China and Brazil was 10 years ago and may offer even better opportunities.
Stocks and real estate tend to do better in growing economies. In addition, stronger economies usually have an appreciating currency. These markets need everything thinkable from infrastructure, to consumer goods, telecommunication networks, and housing. There are almost limitless opportunities for entrepreneurs willing to take some risk and start something new.
To learn about trends and spot the next investment opportunity read the Casey Report from Casey Research. It's a monthly investment news letter that breakdown economic trends in a way that is easy to understand. They make recommendations based on economic reality and their track record is several times better than the market or any mutual fund for that matter.
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