Globe trotting while sticking with winners.
Emerging Markets visited while seeking the next one. By far, not all bloom.
If you are interested in emerging nations what makes them tick and their various stages of development -and particular problems/questions moving forward-, the book to read is “Breakout Nations. In Pursuit of the Next Economic Miracles”, (2012) by Ruchir Sharma, published at the end of April 2012.
Mr. Sharma is head of Emerging Markets Equities and Global Macro, at Morgan Stanley Investment Management. They manage some 25 Bill US$ in emerging market assets. He knows what he is talking about and it shows even while there are some minor mistakes like on page 41 where he talks about Google even though this company did not exist back then. Its an easy read.
The book has gotten generally praising reviews since being published. I agree it’s a great examination as among other things it shows how countries rise and fall and re-emerge with many traps along the way.
He is not so negative as many like to be on the US which he rightly claims is the new global energy leader and where its manufacturing base has been/is being rejuvenated.
The US is not an emerging market but the point should be made that its now again an emerging energy producer. Unlike the Middle East where Oil and Gas production is believed to have peaked everywhere in the Gulf outside Qatar.
On this I wish to add from I read in US reliable sources: today the US is the already the world fastest growing oil and natural gas producer and if you count together output from Canada and Mexico, North America is now the new Middle East, according to a recent report by Citigroup. Oil giant BP projects that by 2030 the US will get 94% of its energy from domestic sources. There is currently a “dramatic collapse” in US net imports of oil in the tune of 1 mill. barrels a day. US natural gas prices are at 1/7th of what they charged in Beijing. The price of natural gas in the US has fallen 80% since year 2008 and during this same time, crude oil production has increased 15%, with new fields just starting in being developed. All this is creating new jobs in a vast sector. “In industries where energy is a major cost, the US is moving into a uniquely advantaged position”, according to this same Citigroup report. The US has now overtaken Russia as the number one global producer of natural gas and dropping off global oil prices will dent some of the previous stars.
But this is not a book on the developed West. The author does seem rather negative on China/India which he claims has seen its best growth days, now past. The author explains well why/how even a marginal slower growth rate, still a higher rate then most others countries growth rates, will feel like a recession there and to countries which gotten to depend on their growth.
“Few front runners stay in the lead for a decade, much less many decades, and identifying those few is an art rather than a science.”
“The average length of time investors hold stocks has been falling from a peak of 16 years in the mid-1960s to under 4 months today. In the 1970s it took $1 of debt to generate $1 of U.S. GDP growth; by the last decade it took $5. Real GDP growth in developed nations is expected to fall this decade to about 2-2.5%” Mr. Ruchir Sharma.
Emerging nations have attracted a huge amount of capital in the past 10 years and rightly so, as for the most part the past decade has been a success story around so many and all at the same time. Private capital flows into developing countries have surged from an annual pace of 200 Bill. $ in year 2000, to nearly a trillion by year 2010. Between 2005 and 2010 the total investment to these grew by a staggering 478%. Yet, only few such countries defy the long odds against success. Its also becoming increasingly clear, that for emerging markets to keep growing, they will have to get well beyond just exports. The classic income trap many bump against is deservingly well mentioned. This is one of Thailand’s risk at present.
The author compares it to “snakes on the ladder”, where you climb up the ladder only to encounter a snake and then fall back down. It is far from assured that past success guarantees future high growth and some of the big mistakes for analysts is extrapolating the past into the future. There are no single magic formulas only a long list of ingredients needed for success. We know the laundry list as being free or near free markets and flow of goods and people, higher savings rates, bank money flowing into productive assets, property rights, low budget and trade deficits, low inflation, open doors to foreign capital etc.. Mr. Sharma concludes more then once that to perceive before others, the combined reason for new success of a country, is often more art then science.
“To travel is to discover that everyone is wrong about other countries.” Aldous Huxley.
Its also clear that countries like Russia and Brazil which grew on the coattails of higher commodity prices face a more uncertain future now. Ruchir Sharma even says these have a “hard decade ahead”. In the past decade these 2 giants (and maybe AUSSI as well with its strong currency) have been among the top stock market performers. China and India are now regressing to lower average growth levels which is reality today -and which the author correctly saw coming already when this book was published a few months ago. I also mentioned this at Thaistocks.com for some time. Growth rates falling off like say a quarter or more lower then before, that will feel like a recession on those and this will have repercussions to other countries like Australia for example which will feel softer commodities’ prices. Africa is emerging but 80% of its exports are commodity related so it too may take a brake just as it was emerging. Among others, Angola is mentioned as one country to invest in if ever they open their markets. Nigeria is also making a comeback due to better politics but South Africa, even while their stock market has been buoyant due to foreign earnings, seems to be on an endless honeymoon to nowhere.
So who does he in the end identify as the next breakout nations? The author makes it very clear that both Poland and Czech Republic are emerging leaders in the Euro zone. Neither signed on to the EU currency and both are largely debt free -besides have younger populations, he calls them the sweet spot in Europe. Poland (their currency is the zloty) is the only economy in Europe which did not contract in year 2008. Poland also has a very vibrant labor market. “The Czech society has sturdy permanent institutions” with Prague increasingly seen as the jewel and gateway of Eastern Europe, its currency is the koruna. Both countries have very sound banks. Contrast this to Hungary (which signed on to the EU money), is on the opposite scale. Only 55% of their adults are working there, the lowest rate in Europe after Malta and Hungary its full of private and public debts and was the emerging trap to avoid a few years ago.
Indonesia ranks higher on his scale as well and for many good reasons, but with commodity prices now dropping again, I wonder if this is sustainable? Lets face it the commodity and higher inflation bulls got it wrong for long, as neither stayed in its upward trajectory they so vehemently predicted. Precious metals have been among the worst major asset class to own this year. And what happened to the commodity super cycle? As the author states, “no bubble is a good bubble and all leave some level of misery in their wakes.” In the second to last chapter he explains why the commodity bubble will have larger and more negative impacts on the global economy than the tech boom did.
I did not yet read the chapters on Korea, Turkey -and Africa which he calls the 4th world. He does write a few pages on Thailand which he identifies positively but states the obvious large negative: a divide between the country and the city where some 40% of the population works in 4% of the countries GDP, which is Agri. There is a dire need to broaden the economic pie and he is negative on the fact that Bangkok is 10 times bigger then the second largest Thai city. But he must be a bit off stating how the Thai consumer is lame -because as we here know- Thai consumer stocks have more then doubled and tripled in price over the past 2-3 years.
The author may also miss the point on the capital. Bangkok has largely grown to the north and east to now very large outskirts, and so is far more then just one big city. Yet this last point is largely correct in that Thailand is far too dominated by its capital. Yet, if you read recent major works like “Triumph of the City” on the other hand, the convincing argument made there is how large cities contribute enormously to a country’s productivity.
Identifying new break out nations depends in which income category. In the higher income class he clearly mentions Czech Republic as the safe haven from the chaos in Europe. Poland, South Korea and Turkey is also favorably mentioned.
A decade ago a few members here suggested I should go visit with them then highly praised emerging neighbor Vietnam -and by year 2007 it was all the rage. I never did and glad to have not done so! Vietnam has to be among the biggest disappointment and gets a horrible review in this book with countless examples. Rightly so as it seems to have done just about everything wrong and lots of foreign investors got it wrong….not least inflation with their “Central Bank currently spending 1 Billion US$ every six weeks to keep their currency from collapsing” Since year 2008, foreign money has fled Vietnam, which is now starved of the capital it needs to get its roads and other basic infrastructure in shape. Universities and colleges in Vietnam are still in the educational dark ages. This country is the butt of the story on emerging markets of recent times.
One page 245 he states, “it is difficult spot a breakout nation in the $5,000 to $10,000 class; the one with the best shot is probably Thailand, where a new leader could heal the capital-versus–country side divide”. We here all know this is the key issue here, to broaden the economic pie to the rest of the country and in some ways there is real hope with the new political leadership here that at least it will try doing exactly that.
Reading all this and reflecting about it after my own travels of late, makes confident yet again on the investor strategy we have in place, for now.
Best Regards,
Paul A. Renaud.
www.thaistocks.com
PS. The painting picture shown above is from a classy Art Gallery/store in Chicago. The artists name is Voytek. (Of course I took this picture with their permission.)
Housekeeping. At regular intervals I go back to older articles and change those to access for all registered users. When I do this, the system is now set up to alert all members as well through a regular notice to a new article. Sorry for this. At the same time you will all know when an article is viewable to non-members.
