When Goldman Sachs first announced the “Brics Dream” in 2001, expectations for emerging economies and their markets were high.
But the reality is not meeting expectations. China’s economic growth has exceeded expectations, India is almost inline, but Brazil and Russia are terribly behind.
Only Vietnam and South Korea are undoubtedly on track for Goldman Sachs’ Next Eleven.
Can they regain their early promises? And what does that mean for your portfolio?
Why emerging markets haven’t fulfilled their promises yet
With the exception of the yuan, emerging market currencies were weaker than expected in the early days of the millennium, but stock markets were significantly below expectations.
Only China is doing well, but its market is 30% below January’s highs, raising doubts about the future.
in the meantime, Emerging markets It accounts for only 11.6% of the MSCI All Countries World Index, which covers 85% of the world’s investable stocks. Excluding Taiwan and South Korea (which should now be considered developed countries), this percentage drops to 8.4%.
However, emerging economies now account for 37% of world GDP at current exchange rates and comfortably account for more than 80% of the world’s population. China alone accounts for 15% of the world’s GDP and nearly 20% of the world’s population.
So why are emerging markets so undervalued in the global stock market?
Part of the reason is that emerging economies have less economic activity than developed economies. Companies in developed countries have a much greater presence in emerging countries than the other way around.
We should not underestimate the wealthy decisions of emerging economies to convert savings into hard currencies and preferably put them in offshore banks or investment accounts.
Emerging markets, like all other markets, are congested by growing US dominance, which now accounts for 60% of the MSCI index.
But the main reason the market is lagging is that emerging economies are not fulfilling their promises 15 years ago.
The pace of astounding and unexpected technological change is not just direct. Technology sector It also includes health care, consumer services, car manufacturing and media. American companies have proven to be the best innovators in the world. China has built an important presence, backed by protection, Chinese and script, culture and politics, but relatively few companies are successful elsewhere.
Fifteen years ago, emerging markets were well represented among the world’s leading markets Commodity company, But they couldn’t fulfill their promise. Many emerging market companies are doing well, but the market lacks the tailwinds of economic growth and currency appreciation that Goldman Sachs predicted 20 years ago.
Politics was a big factor. Governments are becoming more democratic, less effective, and more authoritarian than expected in promoting prosperity.
Narendra Modi, who was elected President of India in 2014, got off to a good start but fell into a pandemic. Jair Bolsonaro, elected by Brazilians to wipe out the corruption of the previous administration, failed to implement the expected economic reforms and, like Modi, mishandled the pandemic. Vladimir Putin has been in power for so long that Russia remains a country dominated by the oligarchs and their business empire.
South Africa has the potential to improve after years of disastrous Zuma, but bad policies implemented by governments from Turkey to Mexico and Thailand to Argentina are hampering these countries.
Where democracy remains dominated, it seems impossible to create a government that can promote sustainable growth. Where authoritarians are in power, creating prosperity is much like a boring endeavor.
China is not a model for emerging markets
China seems to offer an attractive alternative to the Western economic development model, and such a benevolent dictatorship continues to tightly control not only people’s lives but also the path of economic development. This encourages other authoritarians to believe, with China’s encouragement, that they can reject the blueprint provided by the Western government.
But China’s recent history is a catalog of miserable mistakes. The crackdown in Hong Kong alienated Taiwan and ended the hope of peaceful unity.Concealment of Chinese origin COVID-19 Pandemic No one was fooled because he was given a reputation for being dishonest and did not trust the marketing of global leadership.
Uighur crackdowns have been indifferent by governments in the Islamic world, but indications of racist atrocities have gained few friends anywhere. Skirmishes at the border with India unnecessarily made it an enemy.
China’s trade war against Australia has led to fuel shortages and electricity cuts. The good fight between Taiwan and the South China Sea has made it difficult for China to import the semiconductors it needs from Taiwan, South Korea and the United States.
Huawei’s scandal cast a spanner on the work because of China’s desire to incorporate itself into communication systems around the world. The crackdown on domestic private education will lead to a boom in online education from abroad.
In addition to all this, Chinese authorities are out of control of the speculative bubble in real estate and the rampant borrowing that caused it. Real estate and construction make up an unsustainable 25% of China’s economy, but hope the bubble will slowly contract. China may be facing a recession or at least a sharp slowdown in growth. If China were democracy, President West would be worried about reelection next year.
It’s only a matter of time before pragmatism reasserts itself
But it’s a mistake to be too pessimistic. Concerns about China’s invasion of Taiwan are legitimate, but they remain unlikely. It is devastating and extremely dangerous in terms of China’s position in the world. China has no history of military adventure. The last attempt to invade Vietnam in 1979 was a disaster.
If Xi does not do so voluntarily, he may be forced to change or change course. The Chinese Communist Party’s big wig will be well aware that the goal of China’s superpower status was much more successful before Xi became president.
Focusing on wealth distribution rather than wealth accumulation does not necessarily mean a return to Mao-style socialism. China may only imitate the general wisdom of the West. Tighter controls over online games and the Internet also reflect Western public opinion.
Despite the risks, a 30% decline in the Chinese market is probably sufficient to discount these, making the Chinese market attractive to long-term investors.
It is also foolish to estimate the mistakes of other emerging market leaders indefinitely in the future. Populism and nationalism distract people for some time, but voters and street mobs rebel without raising the standard of living.
There really is no substitute for the long slogan of economic development in a proven way.
The first sign of an improving outlook is the recovery of stock markets in emerging economies. Now that we are confidently sluggish, this may be a good time to increase exposure.
The Brics never fulfilled their promise, but is it time to buy?
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