 FT - 26/8/24
The world should take notice — the rest are rising again
An emerging market revival has begun, with dramatic global implications
In the 2000s, as a broad economic boom in emerging economies was drawing billions of dollars into their financial markets, author Fareed Zakaria captured this historic moment as “the rise of the rest”. Now a similarly encouraging story is unfolding in the emerging world, but few observers have noticed and still fewer foreign investors have acted on this momentous shift.
A major comeback is under way. After weakening sharply in the past decade, emerging economies are rebuilding their growth lead over developed economies, including even the strongest one, the US, to levels not seen in 15 years. The proportion of emerging economies in which per capita GDP is likely to grow faster than the US is on course to surge from 48 per cent over the past five years to 88 per cent in the next five. That share would match the peak of the emerging world boom in the 2000s.
This budding boom differs from the last one in key respects. In the 2000s, the emerging world was lifted up by China’s rapid ascent, a massive increase in commodity prices and easy money policies pursued by western central banks. Many commentators assumed “the rest” could continue to boom en masse, on the back of China’s rise, but they would be severely disappointed. In 2012, struck by the excessive hype, I warned of a coming “demise of the rest”. Indeed, the next decade was a dismal one for emerging markets — and a great one for the US.
Now, though, many emerging nations are in a much stronger financial position than the US. As an overstimulated superpower, relying on record deficits to power growth, America is on an unsustainable path. Emerging economies have far lower budget and current account deficits, leaving them with greater capacity to invest and drive future growth. Even countries known in the past for financial profligacy, from Turkey to Argentina, have returned to economic orthodoxy.
The fate of emerging nations no longer depends so completely on the largest one. The current revival is driven by nations other than China, whose difficulties (from a shrinking population to heavy debts) obscure the strengths of its emerging world rivals. Beijing’s nationalist turn and increasingly fraught relationship with the west have spooked global investors, who have been exiting China and setting up factories elsewhere.
In the coming decade, exports are likely to be particularly strong for green technologies and the raw materials required to build them, like copper and lithium, which are supplied mainly by emerging nations. The AI boom is already boosting exports from suppliers of AI-related chips (Korea and Taiwan) and electronics (Malaysia and the Philippines). Investment is increasing in many emerging markets, drawn to a menu of strengths — India’s large domestic market, Malaysia’s fertile environment for data centres and Mexico’s proximity to the US.
As economic growth picks up, corporate earnings tend to follow. Exclude China, and earnings are currently growing at an annual pace of 19 per cent in emerging markets, versus 10 per cent in the US. In the second quarter of this year, for the first time since 2009, corporations in emerging markets (excluding China) beat earnings forecasts by a wider margin than their US counterparts did. Profit margins have been improving in emerging markets and stagnating in the US for 18 months now.
Global stock market investors, mesmerised by megacap American tech companies, have yet to respond. The action has all but dried up in most emerging stock markets, with trading volumes in many countries near 20-year lows. Among the few emerging markets posting competitive gains are those, such as India and Saudi Arabia, that have a strong and rapidly expanding base of domestic investors.
Still, there are signs of a coming shift. America’s growing reputation as the world’s most irresponsible deficit spender — a financial empire that takes its reserve currency status for granted — threatens to undermine the dollar. In recent weeks, the US currency has finally started to break lower, which historically has led to greater capital flows to emerging markets.
After a long sojourn in the shadows of the US, emerging markets are an increasingly attractive bargain. Though they are back to posting faster earnings growth, they trade at record low valuations relative to the US. For 15 years, the US delivered superior earnings growth driven mainly by big tech, but that is turning as well. Earnings growth of the “magnificent seven” US tech firms is now expected to fall by more than half in the coming year.
Of course, it has never made sense to lump emerging nations together in one faceless bundle. The rise of the rest will mean a good decade for emerging nations on average, but led by a select group of stars, each drawing strength in different ways from the favourable trends in global trade, the dollar, economic reform and new political leadership.
Recall that until recently, many commentators were warning that, following the shock from the pandemic, the emerging world was vulnerable to serial crises. Expectations remain so low and fears so high that emerging markets are off the radar of most global investors. But that is the nature of comebacks. They emerge from obscurity, and the deeper the shadows from which they spring, the more drama surrounds the comeback — once it is recognised.
-Ruchir Sharma - the writer is chair of Rockefeller International. His new book is ‘What Went Wrong With Capitalism’ |
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