Would you call markets with these characteristics ‘emerging’?
• Home to almost 20 per cent of Fortune 500[1] companies and 30 per cent of the world’s billionaires[2]
• Average investment grade rating on sovereign debt[3]
• Home to 15 of the world’s 20 largest cities[4]
• Six out of the 15 largest economies, including the world’s second largest economy[5]
• Eight out of the top 10 predicted contributors to global growth over the coming decade[6]
Neither would we. Given the rising importance of some of these economies, we no longer think the traditional developed/emerging divide is appropriate. At Goldman Sachs Asset Management (GSAM) there are eight countries that we now refer to as ‘Growth Markets’ because we believe their current size and macroeconomic conditions offer the potential for transformational growth in the coming decades. The Growth Markets include each of the BRIC countries (Brazil, Russia, India and China) as well as the four largest ‘Next 11’ (N-11) countries: Mexico, South Korea, Turkey and Indonesia. These are the countries that we believe are most likely to experience rising productivity coupled with favourable demographics, and therefore, a faster growth rate than the world average going forward.
It has been almost 10 years since Jim O’Neill of Goldman Sachs created the BRIC acronym to identify Brazil, Russia, India and China as engines of global growth with the potential of ranking among the world’s largest economies.
Since that time, China has created the equivalent of three UK economies, Brazil has generated more GDP than Japan.
CONTINUED RISE
GSAM believes the next 10 years will be dominated by the continued rise of the Growth Markets. These are the countries that are most likely to experience rising productivity and a faster growth rate than the world average going forward.
The other N-11 countries (Bangladesh, Vietnam, Pakistan, Nigeria, Egypt, Iran and the Philippines), should still be considered as traditional emerging markets, but if they work on improving their growth environments, some may be able to transition to Growth Markets.
While ‘emerging markets’ may offer exciting investment opportunities – GSAM thinks it is critical for investors to be selective about where to allocate capital within the 150 countries that are currently classified as non-developed markets [7].
GSAM further believes that the Growth Markets framework can be helpful to investors in deciding where to focus in this diverse opportunity set. In our view, emerging markets can no longer be seen as all offering the same potential.
Even index investors must be careful as there is little consensus on what constitutes an emerging market. Dow Jones counts 35 countries in its broad global index, Standard & Poor’s 19, while MSCI counts 21.
Which of the index providers is right? GSAM encourages investors to think outside the constraints indexes may pose, adopt a robust macroeconomic framework to identify the most important part of the opportunity set, and allocate capital accordingly.
COMBINED PORTFOLIOS
In GSAM’s view, the BRICs and N-11 offer the most compelling opportunities in terms of potential long term growth and equity returns over the coming decade. GSAM believes investors should consider actively managed BRIC and N-11 portfolios to access this opportunity.
In combining BRIC and N-11 portfolios, investors can look to achieve good country diversification, as well as meaningful sector diversification.
BRIC is traditionally quite heavy in commodities as they form a large part of the equity market in Brazil and in Russia. N-11 markets have only 15 per cent commodity exposure so can offer a great complement to BRIC that should serve investors well. For example, in the recent sell-off, the N-11 strategy held up well compared with BRIC indices.
GSAM’s analysis suggests that over the next two decades BRICs and N-11 market capitalization could increase substantially in absolute terms and overtake developed markets. The primary drivers are rapid economic growth and capital market deepening, or new issuance that will be skewed to these countries.
GSAM believes the BRIC and N-11 markets will move from the periphery to the core. As these economies increasingly drive most of the important things in the world, whether that is growth or equity markets, investing in these countries may not be optional for investors who want to build truly global portfolios.
However, economic growth and equity growth are not perfectly correlated. There will be periods, months or even years, when the link between the two may be tenuous.
Over the long term, GSAM believes that investors will be rewarded for anticipating these dramatic structural shifts in the global economy and the global equity markets. This has certainly been the case over the last decade and GSAM believes that it can be repeated over the next 10 years.
LOCAL EXPERTISE
Seeking out under-appreciated or unknown stocks in the Growth Markets requires significant resources. GSAM has been building its local capabilities and now boasts 31 investment professionals based in eight offices across the globe, including São Paolo, Mumbai, Shanghai and Seoul.
