On Emerging Nations – May 1, 2012

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Ruchir Sharma is yet another person of South Asian extraction (following Liaquat Aahmed and Vijay Vaitheeswaran) whose book Breakout Nations has received favorable notice in the mainstream press.  Sharma is the head of emerging market equities at Morgan Stanley Management.  Interestingly, his views run counter to the conventional wisdom which postulates that China will catch up with the United States around 2030, with India climbing to second place by 2050 and with Brazil, Russia and Indonesia not far behind.  Sharma states that only six countries – Malaysia, Singapore, South Korea, Taiwan, Thailand, and Hong Kong have maintained annual gross domestic product growth rates of 5% or more for four decades.  Further that the rapid growth of the past decade has been unusual and will decelerate as already being evidenced in China.  “Failure to sustain growth is the general rule” and that rule “is likely to reassert itself in the next decade”. He advises investors to work harder at discovering economies that are going to be “breakout nations”.

The country on the top of Sharma’s list is South Korea which has built according to the Financial Times (FT) review of Sharma’s book, “on its earlier success in manufacturing exports to create world class brand-led companies such as Samsung in electronics. The other countries Sharma is bullish about are the Czech Republic and Poland whose successes have been overlooked in the “despair over Greece”.  Turkey is a country of promise.  Prime Minister Erdogan has shown that a Muslim country can be a political and economic powerhouse.

Sharma forecasts that as the Chinese economy grows its growth rate will slow down from 10% annually to around 6%. According to the FT review, “those who fear China’s rise will experience ‘tremendous relief’ while those who ‘bet everything’ on China growing 8% or more will face a much nastier surprise”.  On India’s chances of achieving breakout status in the ensuing decades, Sharma gives it a 50-50 chance.  The review concludes that democracies abound among Sharma’s top candidates for breakout nations.

Sharma appears pessimistic about the other two Bric economies, Brazil and Russia.  Both have grown on the back of the past decade’s commodities boom which Sharma forecasts cannot last because technological advances will reduce reliance on raw materials, as they have in the past.

If Sharma is on the right track which I think is more than likely since he has conducted on the ground research in all of these countries, his message is that investors should look closely at South Korea, Poland, the Czech Republic and Turkey.  It may not be a bad idea to keep these countries in view in factoring future investment decisions.

While on this subject a recent Wall Street Journal article provided informative insights into the thinking of some financial advisors regarding the mindset of their clients about investing overseas. It quoted a chief investment officer of a Morristown, NJ wealth-management firm who suggested that a lack of information and fear of the unknown keeps clients from diversifying their investment portfolios through international exposure. According to another, sometimes clients do not realize that US companies are not the only key players on the world stage. This investment advisor disclosed that his clients have about one third of their assets in foreign investments and that he expected to increase that to about 40% within the next year or so. Another financial advisor stated that he tried to forestall client worries by recommending companies with large global footprints.

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