The Economies of the Seven Largest Emerging Markets are Now Larger than the G-7

It was inevitable.  On Tuesday the International Monetary Fund released its new World Economic Outlook.  What will be a major shock to many is that the seven largest emerging market economies, consisting of the BRIC countries of Brazil, Russia, India and China, and the MINT countries of Mexico, Indonesia and Turkey now have a combined gross domestic product (GDP) of $37.8 trillion, based on purchasing power parity (PPP). This compares to a GDP of $34.5 trillion for the G-7 countries of Canada, France, Germany, Italy, Japan, the United Kingdom and the United States.

Also, based on purchasing power parity, China’s economy is now the world’s largest, $17.6 trillion compared to $17.4 trillion for the U.S. economy.

As I discussed in my book, All Roads Lead to China, Purchasing Power Parity is the most accurate way to compare standards of livings between countries. It’s a bit confusing, but the basis of PPP is that residents of one country, should be able to buy the same standard of living, at the same cost, as residents of any other country.

Purchasing power parity solves the problem of comparing countries with different standards of living. It recalculates the value of a country’s goods and services as if they are being sold at U.S. prices.

In 1986, The Economist magazine took a whimsical approach in determining whether currencies were at appropriate market levels. The magazine invented their Big Mac Index.

During the summer of 2013, the price of a McDonald’s Big Mac in the United States was approximately $4.37. The same Big Mac cost $2.57 in China. From this example, one can conclude that Chinese consumers do not require as large an income as Americans to have the same standard of living. The bottom line, it costs less to live in China than it does to live in the United States.

The implications of the seven largest emerging economies now surpassing those of the G-7 are clear.  Increasingly the growth engine of the world’s economy will be emerging market countries.  For investors, the emerging markets are where the real opportunities will be over the coming decades.

Author: Jeffrey Friedland

Geopolitical Risk and Investor Opportunities

The world certainly has its share of geopolitical conflicts, from the Ukraine, to Gaza, to Iraq and Syria, to strife in numerous countries in Africa. Have these wars and conflicts impacted investors? The short answer, as strange as it may seem is “not really.” It seems that the global conflicts are having as much impact on stock markets as the winners of Dancing with the Stars.  

The disconnect between geopolitical events and the world’s stock market is greatly pronounced right now. Most global investors seem to be focused on companies themselves, their cash flows and prospects for the future.  Last week, when international news was led by events in the Ukraine and ISIS controlled territory in Iraq and Syria, the S&P 500 broke 2000 for the first time.  

Today’s global investment climate seems to be more focused on geopolitical opportunities than geopolitical risk. It’s easy to look back into recent history and see other events that have led to opportunities, the ending of dictatorships in Latin America in the 1980s that led to the opening up of markets, the end of Maoism that led to the opening of China, and the tearing down of the Berlin Wall that fled to opportunities in the former USSR.

Perhaps today’s global investors have become complacent, and have concluded that the world will continue to have geopolitical conflicts, but that business and making money has to go on.  

Author: Jeffrey O. Friedland 

Investors Flock Back to Emerging Markets – Bonds, Equities and Currencies are the Beneficiaries

Emerging markets are now back in vogue.  Factors including low yields on European and American bonds are forcing many investors to take another look at emerging markets.  Capital is flowing back into emerging markets at what appears to be the fastest pace in at least a year.Emerging Markets

The current rush to emerging market equity, debt and currencies is a 180 degree reversal from the outflow of $60 billion earlier this year.

Beneficiaries of this inflow of capital include South Africa, Brazil and even Russia.  India and  Indonesia have recently returned to many investors’ radar screens. Both countries are experiencing healthy growth and have new business friendly governments taking power.

One of the most interesting beneficiaries of the influx of capital to emerging markets is Thailand, which so far has had one of the best performing stock markets this year.  Last week’s military coup has had minimal impact on investors.  I guess a coup in Thailand is an ordinary state of affairs. The country has had 11 coups since 1932.

Some of the countries that have the best stock market performance this year are the so-called “fragile five,” countries that it was thought would be the most affected by the tapering of the U.S. Federal Reserve’s quantitative easing. India’s stock market is up 16 percent so far this year, to a large extent due to the country’s new business friendly leader; Brazil’s main stock market index is up 16 percent in just two month’s time; and even Russia’s stock market is a beneficiary. Despite the Ukraine crisis, Russia’s stock market is up 14 percent in the past month.

Slower growth in advanced economies seems to provide a confirmation that economic stimulus won’t disappear anytime soon, which is good news for many countries who many thought were dependent on the flow of cash from quantitative easing for economic growth.  Despite the Fed’s tapering, economic growth has remained steady in emerging markets.  The International Monetary Fund has projected that what it refers to as “developing economies” will grow at almost 5 percent this year, compared to a minimal 2.2 percent in advanced economies.

 

Author: Jeffrey Friedland

Email: jof@friedlandcapital.com

Twitter: @jeff_friedland

Jeffrey Friedland is the author of “All Roads Lead to China: An Investor Road Map to the World’s Fastest Growing Economy,” which is available in print and Kindle editions at Amazon and other booksellers.

He is the CEO of Friedland Global Capital, a firm that assists companies in emerging and frontier markets in achieving their corporate finance objectives, and accessing global equity capital. He is also the chairman and CEO of Global Cannabis Ventures, a firm that enables investors worldwide to participate in the growing cannabis industry worldwide.

Finally, Some Good News from Brazil

Brazil CurrencyEven in the context of the impact of the Federal Reserve’s tapering of quantitative easing on all emerging markets, recent economic news from Brazil has been disappointing. I was glad that there was good news from Brazil with the Brazilian Institute of Geography and Statistics announcement that unemployment in six of the country’s largest metropolitan areas decreased to an average of 5.4 percent last year, from 5.5 percent in.2012. When viewed in the context of unemployment in the U.S. or the eurozone, this is a very low unemployment rate.

But short-term growth in Brazil is another matter. The country likely finished 2013 with growth around 2.1 percent, the third consecutive year of growth below 3 percent. Inflation in Brazil is also an issue. Inflation likely ran close to 6 percent last year, higher than the government had targeted.

It wasn’t supposed to be this way. At the beginning of last year, Brazil’s government optimistically projected 2013 growth of 4.5 percent, citing an expectation for an overall  improvement in the global economy.

It doesn’t look like there will be a turnaround in Brazil’s economy anytime soon. Growth for this year is likely to be around 2 percent, and will be impacted by Brazil’s central bank’s indication that it will raise rates to try to rein in above-targeted inflation.

But I remain bullish on the prospects for emerging markets compared to those of mature economies over the coming decades. I am definitely optimistic for Brazil’s economic future. It’s easy to forget that Brazil, with a population of slightly under 200 million, is Latin America’s largest economy, and will continue to be the engine of the regions growth.

For investors, structural changes in Brazil’s economy are a necessity. The country’s economy needs to change from one dependent on exports and infrastructure spending, to an increased consumer economy. I am optimistic that this will occur as more Brazilians enter the middle class and become consumers.

Many Brazilian small and medium sized enterprises are being challenged by the country’s low growth rate, inflation, and the difficulty in obtaining equity or debt financing from within the country. I, along with many global investors remain bullish as to the prospects for Brazil’s economy. It’s increasingly clear to me and many long-term investors that Brazil and many other emerging markets will outperform most mature economies over the coming decades.  But, it continues to be a challenge to convince management of Brazil’s smaller companies that now there is global equity capital available from global investors with a long-term investment horizon.

Author: Jeffrey Friedland

Email: jof@friedlandcapital.com

Twitter: @jeff_friedland

Jeffrey Friedland is the author of “All Roads Lead to China: An Investor Road Map to the World’s Fastest Growing Economy,” which is available in print and Kindle editions at Amazon and other booksellers.

He is the CEO of Friedland Global Capital, a firm that assists companies in emerging and frontier markets in achieving their corporate finance objectives, and accessing global equity capital.

A Look at Southeast Asian Economies Quickly Leads to Indonesia

Indonesia currencyIt is time to be bullish on emerging markets and look at their long-term prospects.The recent emerging market capital outflows and the impact on emerging market currencies of the U.S. Federal Reserve’s tapering of its quantitative easing should be viewed as just a bump in the road.

It’s hard to ignore the news when plotting or adjusting an investment strategy, and issues impacting emerging markets as a class of investments have definitely been in the news.  If one can get beyond the headlines, two key factors should be focused on, population growth and the growth of middle class consumers.

A region that is projected to be a hot spot of global economic growth over the coming decades is Southeast Asia. It has been ignored by many global investors, and has been in China’s shadow for too long. I am convinced that the region will come into its own over the coming decades. Key to understanding the region’s importance for investors is to look at the amount of foreign direct investment.  In 2012, foreign direct investment into China totaled $121 billion. Southeast Asia was the recipient of almost that much, $111 billion.

The ten countries that make up the Association of Southeast Asian Nations (ASEAN) have a population of 620 million. This population is larger than the combined population of North America, Latin America and the Caribbean. It is also larger than that of the eurozone or North Africa and the Middle East together.The five core ASEAN countries, Indonesia, Malaysia, the Philippines, Singapore and Thailand have grown faster than any other geographical group of countries over the past five years. These ASEAN countries had a combined gross domestic product of over $2.2 trillion in 2012, larger than that of Russia, and about the same as that of Brazil. Many economists expect the region’s GDP to double by 2020.

One Southeast Asian country, Indonesia. stands out as deserving more attention than the others in the region. With a population of 250 million, not only is Indonesia the largest country in Southeast Asia, it also the fourth most populated country in the world.

Since the early 1990s, Indonesia has made significant strides. The country has adopted a more inclusive political system, reduced the authority of its military, empowered local jurisdictions, achieved political stability across its vast archipelago, and for the most part prospered economically.

Since Indonesia is a major emerging market, I have been pushing for the country to be formally added to the BRIC group of countries, which now include not only Brazil, Russia, India and China but also South Africa. This, by itself, would bring well deserved attention to Indonesia.

But all is not rosy in Indonesia. As was the case with most emerging markets, Indonesia was hit by the repatriation of capital in response to the anticipation of the tapering of quantitative easing, and then by the beginning of tapering itself. Indonesia’s stock market and its currency were also hard hit.

Indonesia has relied on exports for its growth, and most of those exports have been commodities, with China being the principal customer. For the five year period of 2005 through 2011 Indonesia doubled its annual exports from $84 billion to $204 billion.

From 2000 to 2013 Indonesia’s GDP grew at an average annual rate of 5.4 percent. For the third quarter of 2013, the country’s economy grew 5.62 percent. compared to the same quarter of 2012. China’s growth rate has exceeded that of Indonesia, but China has its own set of challenges. Indonesia’s historical growth rate is impressive, especially when one compares it to that of the U.S. or the eurozone.

Indonesia is a major player in global metal markets. The country accounts for around 20 percent of the world’s nickel supply and 10 percent of its aluminium supply. Rubber, palm oil, coal and iron ore accounted for over one-half of the of Indonesia’s exports. Due to decreased demand from China, Indonesia was significantly impacted by a decline in the price of many commodities.. Over the past few years, easy credit thanks to the U.S. Federal Reserve and a booming market for commodities avoided Jakarta from having to make what many see as needed structural changes in the country’s economy.

This year is an election year in Indonesia. Both legislative and presidential elections are scheduled, and concerns have been voiced about the political impact of nationalism and populism in the elections. There is a general hope that the outcome of the July presidential elections will be crucial in cementing democratic reforms. A major challenge for the country’s new regime will be how to rapidly increase its middle class, and to increase the size of its consumer market.

Indonesia’s ore and concentrate exports have come to a complete halt, after both a ban on ore shipments and an export tax were imposed a couple of weeks ago. I understand the government’s political and economic objectives of forcing local producers and exporters to process ore domestically to boost industrial development. I can also understand the government’s frustration that mining companies haven’t established processing facilities in the country at all, or at a fast enough rate. This ban on exports plays well to many of the country’s population, especially in an election year, but my conclusion is that this ban will not last for long.

In conclusion, global investors should put Indonesia on their radar screens and find a way to participate in the future growth of the world’s fourth most populous country.

Author: Jeffrey Friedland

Email: jof@friedlandcapital.com

Twitter: @jeff_friedland

Jeffrey Friedland is the author of “All Roads Lead to China: An Investor Road Map to the World’s Fastest Growing Economy,” which is available in print and Kindle editions at Amazon and other booksellers.

He is the CEO of Friedland Global Capital, a firm that assists companies in emerging and frontier markets in achieving their corporate finance objectives, and accessing global equity capital.

My Optimistic Outlook for Emerging Markets

Emerging MarketsSince early last summer, the performance of emerging market equities has been disappointing at best. Investors withdrew an estimated $26 billion from emerging market equity funds last year. Today, there is a high-level of pessimism about the asset class. The downturn in emerging markets essentially started last May with what has been described as a “taper tantrum” over concerns of the impact of the U.S. Federal Reserve’s eventual tapering on emerging market economies.

Many investors are concerned regarding emerging market currencies and the likely impact of the continuation of the Fed’s tapering. The big risk in emerging markets this year is focused on currencies and how they will react to the macro environment, with many investors concerned about the ability of emerging markets to deal with reduced liquidity. These concerns have unfairly impacted many investors’ long-term views of emerging markets economies. Many investors have also conveniently forgotten about the growth engines of many of these countries, specifically population growth and an increasing consumer middle class.

I’m continuing to take a longer-term and optimistic view of emerging and frontier markets. I have concluded that a repeat of the emerging market economic crises of the 1990s are unlikely. Some poorly managed countries, such as Argentina, may default again, but I am not concerned regarding contagion. Most emerging market economies are in pretty good shape despite the impact of the Fed’s tapering and their own economic and political challenges. These countries will benefit from any general global upturn in growth.

So, what should an investor do? To me it’s clear. When one looks at the longer-term prospects for emerging markets, it’s easy to conclude that many of the countries will serve as engines of global growth. Some countries immediately come to mind. These include China, Indonesia, Mexico, Poland and Brazil. The sell-off in equities in many of these countries provides a real buying opportunity for those investors who understand the impact of huge populations and the increasing middle class in many emerging markets.

What does this mean for entrepreneurs and business owners in emerging markets who are dealing with the challenges of obtaining local bank credit or having difficulty in accessing equity? For these companies, there has never been a better time to seek foreign capital from investors who are cognizant of the long-term prospects for many of these countries and who truly understand the causes and minimal long-term impact of the Feds’ tapering and its short-term effect on currencies.

Author: Jeffrey Friedland
Email: jof@friedlandcapital.com
Twitter: @jeff_friedland

Jeffrey Friedland is the author of “All Roads Lead to China: An Investor Road Map to the World’s Fastest Growing Economy,” which is available in print and Kindle editions at Amazon and other booksellers.

He is the CEO of Friedland Global Capital, a firm that assists companies in emerging and frontier markets in achieving their corporate finance objectives, and specifically accessing global equity capital.

An Alternative View of China’s Economic Growth

ChinaMuch has been said about China’s reduced economic growth. China’s economy finished 2013 at 7.7 percent, generally considered to be lackluster. Many have viewed the slight decline of the rate from 2012”s growth rate of 7.8 percent as a sign that China’s economy is in for a hard landing. To a great extent that is wishful thinking among those who are cheering for China’s economic demise.

It’s widely acknowledged that China has altered its growth model, and that the years of annual growth in excess of 10 percent are long gone.The key to China’s economic future is sustainable growth, and annual growth in the 7 to 8 percent is likely the new normal for the foreseeable future.

I remain bullish on the long-term prospects for China’s economy.Compared to the economic growth of the U.S. and the eurozone, China’s growth rates for last year were at a minimum spectacular. One can only imagine the American exuberance if the U.S. economy grew at a rate anywhere close to 7.7 percent.

The dollar value of the growth of China’s economy last year was $818 billion. To view this growth rate in perspective, China’s economy grew in 2012 slightly less than the entire value of Indonesia’s entire economy, a country with a population of 250 million, and the world’s 16th largest economy.

What does this mean for 2014? If China’s economy grows at a rate of only 7.7 percent this year, over the two-year period of 2013 and 2014, China will have added to its economy an amount equal to the entire value of Australia’s economy. Australia’s economy was valued at $1.54 trillion in 2012, and is the world’s tenth largest economy.

What does this mean for investors?There is no question that China has its challenges. It’s clear to me that for the next few decades, China’s growth rate will likely exceed that of any other country or region. For both individual investors seeking opportunities in the world’s fastest growing economy, it’s likely that Chinese listed companies and exchange traded funds will outperform their peers in most other countries. For institutional investors, including private equity funds and wealth funds, Chinese investments will likely provide returns exceeding those generated anywhere else.

Author: Jeffrey Friedland
Email: jof@friedlandcapital.com Twitter: @jeff_friedland

Jeffrey Friedland is the author of “All Roads Lead to China: An Investor Road Map to the World’s Fastest Growing Economy,” which is available in print and Kindle editions at Amazon and other booksellers.


He is the CEO of Friedland Global Capital., a firm that assists companies in emerging and frontier markets in achieving their corporate finance objectives.