June 04, 2012

Sharma of Morgan Stanley Predictions for China, India and Other Emerging Markets

Break­out Nations is Ruchir Sharma’s book on the Bric countries – Brazil, Russia, India, China – and the rest of the developing world. In his day job, Sharma is head of emerging market equities and global macro at Morgan Stanley Investment Management.

He warns that today’s “mania” for emerging markets is driven largely by the supply of cheap money that developed world central banks are pumping out to keep their economies afloat. Sooner or later, the bubble has to burst.

Only six countries – Malaysia, Singapore, South Korea, Taiwan, Thailand and Hong Kong – have maintained annual gross domestic product growth rates of 5 per cent or more for four decades. The rapid growth of the past decade has been unusual and will decelerate.

In its place, the new normal in emerging markets will be much like the old normal, dating back to the 1950s and 1960s, when growth averaged 5 per cent and gains by some countries were offset by crises in others. “Failure to sustain growth is the general rule,” Sharma writes, “and that rule is likely to reassert itself in the coming decade.”

In China, the great challenge is managing expectations as its economy gets bigger and GDP growth inevitably slows – from 10 per cent annually to, say, 6 per cent. Those who feared China’s rise will experience “tremendous relief” while those who “bet everything” on China growing at 8 per cent or more “will face a much nastier surprise”.

India’s chances of achieving breakout Sharma puts at 50-50. Its young population and entrepreneurial drive give grounds for hope, as does the fact that per capita incomes are only a quarter of China’s, giving lots of scope for growth. But all this is set against India’s many weaknesses, not least the recent “national overconfidence”.

Sharma has little time, though, for 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. The “this time it’s different” argument is just wrong.

Sharma’s larger point is that “China has already emerged.” It is, after all, the second largest economy in the world.

I would agree that China only needs 6% annual gdp growth for the 2012-2030 period. China can still do better than that level.

Nonetheless, he says his colleagues on Wall Street are not facing up to the fact that China’s rate of GDP growth is “naturally slowing down”. He does not believe that consumers are in a position to rebalance the economy. He argues that rebalancing will occur when China’s exports and investment come down and the GDP growth rate slows to about 6 per cent.

The argument that China needs 8 per cent growth to maintain jobs growth and in turn social stability is wrong-headed as well. Not only is just about every employer in China’s export hub, Guangdong province , complaining of labour shortages, but the population is greying rapidly as well.

China’s average age is already markedly higher than Taiwan and South Korea were at an equivalent rate of development. What needs an urgent stimulus, improbably for a country that is the most populous in the world, is China’s birth rate.

Top of his list is South Korea, “gold medallist” of the emerging world, which has built on its earlier success in manufacturing exports to create world-class brand-led companies such as Samsung in electronics. With North Korea close to collapse, there is another huge growth impetus on the horizon.

Further behind on the development curve is Indonesia. But, for Sharma, it is the best-run large commodity exporter, with solid finances, a strong investment record, and plenty of undeveloped economic potential.

He is also bullish about the Czech Republic and Poland. Turkey looks promising too.

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