The outlook for emerging markets
Ivo Daalder: Ed, you and I have decided to take little global tour, to go round some of the key emerging markets of the world to see where we think the opportunities and challenges for global business lie.
Perhaps we’ll start with the BRIC economies – because that’s the place where most people think most of the opportunities reside with Brazil, with Russia, India, China. Now, I’m not an economist and I don’t invest. I’m a political scientist, a diplomat and I look at this category of BRICs and I don’t understand it. If you look at these four, they are completely different.
Brazil is a country of enormous opportunity but perhaps even greater challenges. This is a country that is trying to find out where it is going economically and politically. It’s a leader of South America and yet it is struggling internally.
Russia is in many ways a declining power. John McCain famously called it a petrol station with nuclear weapons which I think is slightly unfair. But it certainly has lots of natural resources, lots of weaponry and perhaps not a lot else.
India – we will have to see. Change in government will be very interesting to see whether Mr Modi and his party can really change the fundamental direction of India. But it is a country that has huge as yet unfulfilled potential.
And last but certainly not least, China, the undoubted rising power. We’ve been focused on it for 20 years and continue to do so.
So, my question to you Ed is this: is it useful to think about the BRICs almost as a single emerging market from an economic and investment opportunity? Or should we really look at these countries as individual entities?
Ed Nusbaum:. I think you’re absolutely right, the BRICS term, coined by Goldman Sachs a few years back, is probably past its prime in a way of a term. The countries are so different. Their economic position is different and their development trajectories are so different.
China continues to be a world leader and growing rapidly. Yes, growth is down to 7.5%, but most countries would love to have that. It’s well planned and well organised. The infrastructure is there and our business optimism confidence show that leaders continue to be optimistic about the development of their economy. In fact, one thing interesting in China is that in most parts of the world, our Q2 survey showed that business leaders are more optimistic about their own companies than they are about the overall economy, but in China it is the exact opposite. Business leaders are more optimistic about what the government is doing in the overall economy than they are about their own operations. So, there is some cautiousness there and it’s a changing economy, moving away from exports and investment, towards consumerism. But it remains an economic powerhouse.
India is very, very different to China. It’s way behind in terms of infrastructure and corruption remains a key issue. But business leaders are very excited about the new government. Our Q2 report showed Indian business optimism as the strongest in the world at present. They’ve clearly got a lot of issues, but they’re dealing with them and remain very enthusiastic.
Brazil has hit a bump in the road. It’s really emerged over the last ten years as a strong trading partner with the US and China, but economic and political challenges remain. It now seems a long time since 2010 when the economy expanded by 7.5%.
And Russia is struggling. The people there are very patriotic and they’re very supportive of their government in terms of ongoing conflicts. But our surveys show a tremendous amount of growth concerns amongst business leaders, obviously because of the political issues we see today.
ID: Okay, we’ll come back to the BRICs later, but is there another place in the world we should be looking at? Take for example, Southeast Asia. We are seeing rapid development in Myanmar, Vietnam, Indonesia and Malaysia. Are these now the truly emerging markets? If we accept that the BRICs are not moving together, would Southeast Asia be a more useful focus as an actual geographic regional entity?
EN: Well clearly there’s opportunity in all of those countries – but they are still a long way off from being as successful as China.
Indonesia is the fourth most populated country in the world – more than 240 million people. Business confidence has taken a bit of a setback recently but the latest I heard is that Jokowi is set to win the election. He’s a former business person, governor of one of the states there. So, he’s probably the right leader from a business standpoint.
In Malaysia on the other hand, business optimism is up. It’s a much smaller country – just 30 million people – but we’ve seen a track record of 50 years of economic growth there. It will continue to expand, I think, but they still have a lot of issues to contend with.
Vietnam – we’ve seen a lot of companies moving there with much success; we have a lot of very successful clients in Vietnam. But, it’s still a long way off from having the infrastructure and the capacity that China has.
So, yes, I do think these economies are emerging quickly, and offer increasing opportunities for investment. But they each have a certain level of infrastructure issues and certainly have a long way to go before they can compete with China.
ID: So, let’s move back to China. It remains the big elephant in the room. It’s where a lot of folks are putting a lot of hope on, and rightly so, for all of the reasons that we know.
I talked recently with Hank Paulson, the former US Secretary to the Treasurer and Kevin Rudd, former Prime Minister of Australia, and I walked away from these two people, who know China perhaps as much as anybody outside of the country, with this sense and extraordinary optimism by these two leaders that the current leader of China, Xi Jinping, will single-handedly solve all the problems that China has. The environmental problem, the fact that you go to a city and you can’t breathe the air; you certainly wouldn’t want to bring your kids up there. The regional problems that are occurring because you now have a China that is expressing itself as a more confident power in the south and east China Seas. This growing sense of nationalism among the population. A sense that corruption has infected the party, if not the society at large. All these problems were described by Hank and Kevin in great detail and yet there was this optimism that this one guy who is in total control – the New York Times says not only the economy but foreign and security policy – is going to solve this issue.
As someone who thinks about investment and looks at the problems across the country and looks at the leadership, how should we look at this?
EN: We have about 3,000 people in China but it is undoubtedly a very complex place. I don’t know if a single person is going to solve all the problems, but China is prepared to address its problems. Every time I go there – I’ve been there several times in the last 12 months – and I meet with the Ministry of Finance and other leaders, it’s clear that they recognise the pollution problem, for example. They know they have an issue and they’re going to address it; one way or another, they’re going to fix it. Now, it may take a few years, but they’re hitting it head on. When they see a problem, they throw a lot of resources at it and they find a way to solve it. On the other hand, you can’t get a straight answer on what’s causing a particular problem – whether it is the factories, the trucks, the energy production – everyone gives you a different reason for the massive amounts of pollution.
But there are a lot of complicated issues in China. You’ve got tremendous wealth and growth in Beijing and Shanghai, still huge poverty out in the countryside, although the situation is certainly improving in many rural areas. There’s much more consumerism in society than ever before, which is a positive thing in many ways because it generates domestic demand for products and services.
So I don’t think any single person will be able to solve the problems – or that they’ll solve all their problems overnight – but China has a pretty good process and is moving in the right direction.
ID: So let’s put China in the win column there. Let’s take India next, where of course the problems are significantly larger in some ways; you might say the road to be travelled is significantly longer. The optimism that you mentioned in your business surveys, is married to the optimism, it seems, of the Indian population in this new government – a government, by the way, run by a guy that was a governor and a very successful one, but with quite nationalistic, political background. How do you see this government, in terms of the challenges it faces and the solutions it’s proposing? And how do rate the long-term growth prospects?
EN: Indian businesses are successful all over world and we do some great work there. I think those opportunities will continue to grow and many of those Indian firms will become more successful in the global marketplace. Just take an internationally-renowned company like Tata, which bought Jaguar-Land Rover: it’s incredibly successful.
We held our global conference last October in New Delhi and the whole experience was classic India. We had a great time there; it was a great conference, with great speakers, the service was fantastic. However, originally we were going to use the beautiful facilities at the JW Marriot; when I visited in February it was almost done but because of security fears they couldn’t get an operating license. They finally opened in October, but by that stage we had already chosen a different hotel. Bureaucracy remains a real challenge.
The amount of corruption that exists in India is still very strong and the infrastructure is not there for global businesses to be successful. We have a very successful operation in India which is growing very rapidly, but if you had to build a factory you could do so with much more confidence in China than you could in India.
Now, having said that, there are a lot of things that are successful in India, including outsourcing. Like many other global companies, we have a large shared service centre there. There’s a huge, talented, well-educated group of people that can provide a wide variety of services. They are much stronger than many other countries in terms of the quality of education. The business enthusiasm is there but the new government really needs to get to grips with infrastructure and bureaucracy if India is to fulfil its enormous potential.
ID: Finally, let’s look at Russia. Here’s a country that in one sense holds huge promise. It does have extraordinary resources, it has an extraordinary, well-educated talent pool. It has the infrastructure and transportation otherwise to be closely connected and the bridge between Europe and Asia. But it just has this small problem: it has a bunch of political leaders that don’t seem to care about the economic health of the country, but care deeply about its political and military strength. And not just because of what happened in Ukraine in the past few months.
When you look at Russia, where does the opportunity lie from an investment perspective? Or, is this the kind of place where you would prefer to start looking at alternatives?
EN: Well, you have to consider both short and long-term growth prospects. Whereas business optimism has reached record levels in Europe, Japan and the US – driven by the digital economy and increasing export opportunities – Russia has gone the other way because business leaders see the government getting in the way of their ability to export and to grow their operations.
Russia’s strength is in natural resources; so as long as oil and gas prices remain high, the economy will remain strong. They’ve done a deal recently to sell gas to China, and Europe remains a key market. But as an external investor, I’d be very reluctant to go there in the short-term. For a US company, for example, to make an investment in Russia – there’s just too many risks associated with the political environment. It’s not just about Ukraine, but that is certainly an example of the difficult situation. I think everybody recognises those risks and, in the short term, Russia is a very difficult place for Western businesses to operate right now.
In the long-term, there is considerable underlying strength in the economy, as you say. But, right now, the current government and its policies are very popular. They’re not changing. As long as that is the case, I think it is a difficult place to do business.
ID: Well, I think that’s all we have got time for. Thank you, Ed.
EN: Thank you, Ivo. I really enjoyed it.