BERLIN - The downfall of the West has been predicted many times – and then always postponed. Ninety years ago, Oswald Spengler in his book, “Decline of the West” wasn’t the first to announce it and he certainly wasn’t the last.
Now there is more fodder for “declinists,” as they are known – from the economic sector. Some time during the course of this year, the industrial nations will for the first time account for less than half of the world production. For many observers, that will make 2013 a historic turning point.
While the old West is losing economic influence, heavily populated countries like China, Brazil, India and Indonesia are rising. And just behind these future powers, strong-growth nations like Mexico, Pakistan and Turkey are also powering forward.
Hedge funds and other major investors are already adjusting to this paradigm change, although private investors lag behind. For the moment, Germans have invested less than 10 billion euros – 4% of the capital in equity funds – in emerging country funds.
Measured against their economic clout, emerging countries are under-represented on the world’s stock markets. Although they account for over half of the world’s gross domestic product (GDP), their equity markets together are only worth $13.6 trillion. That’s a quarter of the global market value of $53.5 trillion. By way of comparison, Wall Street alone puts $17.3 trillion on the scales.
There are good reasons to believe that emerging markets will continue to grow. One is that 86% of the world’s population lives in the non-industrialized nations.
The currency reserves of these emerging countries is also impressive – presently two-thirds of total global reserves of $10.8 billion. China, Brazil and Russia alone are sitting on over $4 trillion worth.
That’s leverage – emerging market governments can use these reserves in crisis situations, to defend their own currency or in the event of a currency war to influence global capital markets.
Also speaking for the emerging markets is their low debt – the 70 emerging countries listed by ratings agency Fitch show on average debt of only 39% of GDP. The 30 developed markets on the other hand show 76%. The U.S. alone accounts for $16.4 trillion of the debt.
Less social spending also works in favor of the emerging countries, although many Western critics condemn this as unfair competition and social dumping.
Strategists at asset management firm BlackRock say that from the investor’s perspective there are many arguments for investing in emerging markets not least that growth potential over years – decades – is higher.
The main reason for this is that the population of the former Third World countries is growing faster than in the aging industrial countries. In addition, productivity in most emerging countries is growing faster too, albeit at a much lower level.
Although China is the world’s second largest economy, most economists are saying that growth this year will only be 7.5% to 8%. In total, emerging countries are likely to grow by 4.5% this year, although the emerging Asian countries are expected to grow most strongly at 6%. Latin America can expect a growth rate of 3.5%. By contrast, the euro zone economies will on average shrink by about 0.3% in 2013.
Brazil, in sixth place, has already overtaken the mother country of industrialization – the United Kingdom. In 1913 the Brazilian economy was not even a tenth of the size of the UK economy.
The term “emerging markets” was coined in the late 1970s by Antoine van Agtmael, an economist at the World Bank’s International Financial Corporation.
Before that, money managers who explored opportunities in these regions, spoke of investing in the Third World or in “underdeveloped countries” – which understandably didn’t spark much enthusiasm from investors. One of the first back then to recognize a megatrend was Tom Hansberger, formerly with the U.S. Air Force, who together with American investor John Templeton set up the first emerging market funds.
Yet as late as 1987 the stock market value (market capitalization) of all emerging market stocks was only 332 billion euros. That corresponded to 5% of worldwide market capitalization of 7.8 trillion euros. At first, emerging market products were difficult to place and only appealed to a small, elite circle of investors.
But things changed in the 1990s – emerging markets became fashionable. A steadily growing number of funds were garnering more and more investor capital. By 1996, emerging market equities totaled $2.2 trillion – 11% of world market capitalization of $20.2 trillion.
Then came a major setback. In the Asian crisis in 1997, it became apparent that not all growth models were sustainable. At the height of the exultation before the crash, some of the “tiger economies” were consuming more than they were producing. Previously popular emerging stock market, such as Bangkok crashed, losing 80% in a year.
In today’s enthusiasm for emerging markets there are a few pessimists, like John Higgins, a Capital Economics markets economist, who worries emerging market bonds have become a financial bubble.
Ian Bremmer, the president of political risk firm Eurasia Group, has even put emerging markets on the top of his list of 2013 "global risks." He says that emerging markets investors have become too uncritical, and have tuned out to issues like lack of political stability in some countries. More to the point, he says, "emerging countries" should not be viewed as a group, but rather analyzed individually.