With emerging markets home to around 20 percent of all Fortune 500 companies, 30 percent of the world’s billionaires, and including among them the world’s second and seventh largest economies, can they realisticaly be referred to as emerging any more? Kathryn Koch, of Goldman Sachs, argues that a group of those countries - Brazil, Russia, India, China, Mexico, South Korea, Turkey and Indonesia – should be redefined as growth markets
By Kathryn Koch, senior portfolio strategist and chief of staff to Jim O’Neill, Goldman Sachs Asset Management
BRAZIL Russia, India, China, Mexico, South Korea, Turkey and Indonesia: apart from being exotic vacation destinations, what do a group of countries as diverse as these have in common? These so called ‘emerging’ markets are home to almost 20 percent of Fortune 500 companies, 30 percent of the world’s billionaires and currently include the world’s second and seventh largest economies. With these characteristics in mind, how can one call these markets “emerging”?
Since the term was coined back in the 1980s, the economies that comprise the “emerging” markets have grown from one percent of global equity market capitalisation to 13 percent. However, even within this group, macroeconomic improvement and growth varies by country. Given this, at Goldman Sachs Asset Management (GSAM), we believe it is time to redefine the emerging markets.
We propose calling the eight ‘emerging’ countries that already contribute one percent or more each to global GDP – Brazil, Russia, India, China, Mexico, South Korea, Turkey and Indonesia – “growth” markets. In our view, the current size and macroeconomic conditions of these markets offers the potential for transformational growth in the coming decades. These countries will become eight out of the top ten contributors to global growth this decade.
The criteria we have selected to define a Growth market includes an economy that contributes at least one percent or more to global GDP, has the potential to grow further, enjoys favourable demographics and offers adequate market size to achieve necessary scale and liquidity for investors. Of the eight countries, the largest growth markets by global GDP contribution are Brazil, Russia, India and China – the BRICs – a group we believe that offer the greatest potential to impact the global economy. The remaining growth markets, Mexico, South Korea, Turkey and Indonesia, are the four largest of the Next 11 (N-11), a group of 11 countries we have identified as the next most populous in the world after the BRIC countries. This demographic advantage is an important driver of growth.
Home to almost half of the world’s population, the eight growth markets are expected to add over 300 million people to the labour force over the next two decades. Furthermore, the populations in these markets are young; more people in the workforce earning money to spend results in economic productivity and consumption, both of which are engines of growth.
Currently the growth markets represent 23 percent of global GDP and over the next decade we expect they will significantly grow to collectively contribute 60 percent of global GDP growth. This potential impact on global economic growth distinguishes the growth markets from both the slower growing developed markets and smaller emerging markets.
GSAM’s chairman, Jim O’Neill, first identified the BRICs and N-11, believing these countries had the potential to have a major impact on the world. Currently, BRIC and N-11 comprise 23 percent of global equity market capitalisation. This share could rise to 36 percent in 2020 and 46 percent in 2030. With higher market capitalisations and a larger number of stocks in the Growth markets compared to emerging countries, equity market development and participation will fuel Growth market expansion. And as these markets continue to deepen and their levels of investability increases, we believe there is significant opportunity for investors to capture growth from growth markets.
Fortune Magazine, 2010 Global Fortune 500, Forbes Magazine, 2010 World Billionaires, IMF World Economic Outlook 2010, as at October 2010, MSCI, based on initial ACWI market capitalization in 1988 and March 2011, IMF World Economic Outlook Database, October 2010, GSAM, It is Time to Re-Define Emerging Markets, January 31, 2011. Data from IMF World Outlook 2010, Goldman Sachs Global ECS Research, Global Economics Paper No: 204, September 8, 2010.
This material has been approved in the United Kingdom solely for the purposes of Section 21 of the Financial Services and Markets Act 2000 by Goldman Sachs Asset Management International, which is authorised and regulated by the Financial Services Authority (FSA).