Conference Presentation, Panel
Emerging Markets: New Affluence and Influence
Milken InstituteFrancesco Guerrero, John Coombe, Thomas Flohr, Chris Hung, Sarah Service, Jay Pieloski
- Emerging markets are projected to drive 80% of global economic growth over the next 10 to 15 years, with a structural shift from export-led to domestic demand-led models expected to create a stagflationary environment tempered by currency appreciation.
- China is forecast to sustain significant GDP growth at 7% without a hard landing, while India is predicted to be on an upswing aided by lower oil prices but may face structural prosperity challenges over the next 10 to 20 years regarding power and manufacturing.
- Brazil is anticipated to exit a downswing and enter a growth phase by the next year, with specific opportunities identified in property and infrastructure spending, whereas Russia is expected to enter a cyclical downswing with future structural uptrends hinging on reforms.
- Mexico is expected to increase growth rates from 2% to 3% or higher following political agreements on major reforms, and Indonesia is projected to show accelerating growth driven by a young, educated population despite infrastructure deficits.
- Africa is identified as the next major growth region containing seven of the world's 10 fastest-growing economies, with specific investment targets for East African nations (Tanzania, Kenya, Mozambique, Uganda) offering potential 5 to 10 times returns, while West African bond opportunities are considered to have likely passed.
- A "tripolar" or "four-polar" global structure is expected to emerge by 2025, with Africa joining Asia, the Americas, and Europe as distinct poles, and trade within regional blocks anticipated to be the primary source of real growth over the coming decade.
- Currency strategies are predicted to flip as emerging markets pursue strong currencies and developed economies weaken theirs, with the Asia-Japan real effective exchange rate expected to continue appreciating 15% from 2007 levels while the US dollar is forecast to depreciate 10% in real terms.
- Dim Sum bonds are expected to offer a premium of a few hundred basis points for foreign investors, with total potential returns reaching 8% to 10% if currency appreciation continues, alongside increasing attractiveness for local currency debt due to liberalization.
- Infrastructure spending across emerging markets is expected to generate annuity streams via toll roads and funds offering 4% to 5% annual yields, while Chinese outbound tourism is projected to expand from 300 million to potentially one billion people over the next 5 to 10 years.
- The transition to domestic demand-led growth carries risks of subpar growth and returns for several years, particularly in equity, while geopolitical risks in the Middle East remain a significant concern and Europe is viewed as the least optimistic region due to structural issues.
- Specific market cautions include avoiding Argentina due to high risk, viewing the Brazilian equity market as potentially expensive despite infrastructure opportunities, and the risk that quantitative easing driven yield searches may reverse if central banks withdraw stimulation.
- Business jets are expected to increasingly facilitate investment exploration between African nations like Angola, Mozambique, Tanzania, and Kenya, while human capital returning to emerging markets is forecast to drive long-term growth through entrepreneurship and aviation service demand.
- Investment strategies are shifting toward regionalization over the next 5, 15, or more years, with Russia's central government expected to guide investments that could provide Siberia with its first significant opportunities in centuries.