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Battling the emerging market bias

March 9, 2020
Jungle Insights

Titans of finance, economics, and industry leaders gathered under one roof earlier this month, to discuss the indisputable rise of emerging markets, its consequences, and the opportunities that lie ahead. It was stimulating to hear varied perspectives; from finance, strategic intelligence to government officials, as they shared their accumulated wisdom on the future of emerging markets, and the evolving face of globalization. There were some discussions that really stood out for me.

Economic Interdependence

There is an overall consensus that the new world order is no longer dictated by developed markets. 95% of the population and 85% of the purchasing power is outside the US. To paraphrase Jack Lew, 76th US Secretary of Treasury, a 1% reduction in growth in the US would mean a 0.8% impact on the world economy, whilst a 1% reduction in growth in China would impact global growth by 0.5%. The impact is not very different.

Take China and coronavirus for example. China is hugely more important to the world economy than it was back in 2003 during the SARS epidemic. Even small changes in China have huge effects worldwide and we are already seeing that the economic impacts of the Coronavirus are much larger.

Globalisation today is about the digital economy. To quote Susan Lund, Partner, McKinsey Global Institute, ‘while the growth rate of global trade in goods has grown more slowly than it did in the past 20 years, the growth of volume of internet traffic around the world has increased by 100x over the last 15 years. Today data flows and the digital economy are the connective tissue around the world’. Not only that, the world today is becoming increasingly multipolar and we are seeing more trade between developing countries.

Emerging market prejudice lingers

Emerging markets are going to soon account for 70–80% of the global economy’s activity.

I have often talked about Southeast Asia as being the land of opportunities with 650 million people, where 3 out of 5 people are below the age of 35 and who are the most digitally connected and digitally engaged population in the world. The GDP in this region is growing by 5–6%, is expected to become the 4th largest economic block in the world by 2030. Similarly Africa, which is at its early stages of becoming a global economic power and is seeing its working population increase by 30%.

This opens up huge opportunities in emerging markets across sectors. However, prejudice against emerging markets continues to guide investment decisions, because these markets are believed to be inherently high risk. The lens one needs to take is not about avoiding the opportunity in the emerging markets, but about mitigating the risk. It’s about recognizing the underlying opportunity, identifying key sectoral and secular themes to invest in, and managing the risk. Unfortunately, not much has changed in the thinking on how to understand, assess and analyze risk in emerging Vs developed economies.

As per Adiba Ighodaro, Partner and Head of Strategic Relationships at Actis Capital, $14Tn of the $17Tn needs to be invested in emerging markets for electricity infrastructure. However, the quantum of capital being invested and deployed is exactly in the opposite geographies!

Time for inclusive growth

While the degree of integration in the world is growing, we still have to learn how to navigate this transition and this intricate web of interdependencies in the world. It’s not surprising hence that when China slows in growth, we see an impact on global markets. New rules of engagement have to accommodate the emerging economies along with the developed markets.

Take climate change for example. A unique economic problem with catastrophic consequences, the worst of which are still far away. Concerning developing economies, the key is not to lecture and impose high restrictions, but instead to help them grow in an environmentally conscious manner. This is something the developed world is acclimated to. What is important is that we are aware of what benefits and what hinders the planet, the priority is to maintain growth in the developing nations whilst still helping them ecologically. Therefore, developed nations can provide leadership and guidance for its developing neighbors.

To conclude, there remains a distinction between emerging and developed markets. Perhaps the most prominent takeaway is the transformation of globalization itself. By teaching and learning from emerging nations, can the developed world ensure they grow at a rate that is both economically and environmentally conscientious?

The article contains excerpts from the ‘Rethinking Global Markets’ event hosted by the Wall Street Journal and Foreign Affairs on 5th February 2020.

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