[Ed Note: Benjamin Graham, if he was alive today, would no doubt be very pleased that his treasured principle “margin of safety” has entered investing vocabulary. It has done so to the point many probably don’t know it came from him, but somehow it still got to them. The same thing happened to Jim O’Neill, who coined the term BRICS – an acronym that turned into a noun.
Jim O’Neill has a new book, The Growth Map, exploring investing and business opportunities in emerging markets. David Thomas, a keynote speaker at “After America”, does the same thing for a living. With thirty years of experience, David says there is plenty of profit to be made in the BRICS – as those attending “After America” will discover. David kindly allowed us to republish this blog entry, where he shares some introductory thoughts on the topic.]
The rapid economic decline of the US and western Europe, fuelled by indecisive and frightened politicians, massive debt and a bloated sense of entitlement, has accelerated the process (first predicted by Jim O’Neill of Goldman Sachs as early as 2001, and now referred to as “the end of the great divergence” by Niall Ferguson in his recent TED lecture in Edinburgh) of transforming the global economy to one which is dominated by four countries – Brazil, Russia, India and China (The “BRIC” countries). Not far behind, although starting from a much lower base, is Continental Africa, referred to as the “last great emerging market” in our most recent issue of Insights.
What we don’t know, and is very hard to predict at the moment, is how painful this transition will be. Will Germany accept the horrible reality of a $2 trillion deficit in southern Europe and take decisive action by paying a figure which represents two-thirds of their total GDP into the system to save Greece and other ailing economies, and prop up the banks that will become insolvent in the event of a sovereign default? Or will the politicians prefer the “death by a thousand cuts” approach which has prevailed so far?
Will the US face up to its own insolvency (with its total debt now at 100% of GDP and rising) and make serious and meaningful cuts to its Federal Budget? Or are we simply putting off the day when the US faces its own major debt crisis which will be too large for any other country to rescue and lead to a deep and painful global recession? As each day goes by it isn’t hard to paint a very pessimistic scenario for the future, despite the hope that sense will eventually prevail. Volatile investment markets simply reflect the confusion, fear and panic that exists throughout the investment community.
Unfortunately, this all happened much sooner than it was meant to! The BRICs are still relatively small economies (though growing rapidly) and are nowhere near ready to prop up the whole global economy. In any case, they are all going through their own internal transformations so as to be able to maintain economic growth despite the absence of the American consumer, the engine that has fuelled global growth for the last 50 years or more.
The key BRIC trends to be following to feel confident and optimistic about the future are as follows:
BRIC Domestic Consumption
China’s transition from an export driven economy to one which is dominated by domestic consumption (with urbanisation, rising wages and the development of a world class services industry as key drivers) is the focus of the 12th Five Year Plan and was the subject of the July issue of Insights. India’s economy is already dominated by strong domestic spending, and Brazil’s wealth of resources, agriculture and renewable energy offers a high degree of self-sufficiency.
However, Russia has the largest consumer class amongst the BRIC countries, the highest GDP per capita, the lowest level of debt, and now leads the whole of Europe in the sale of key consumables e.g. pharmaceuticals, mobile phones, broadband and even beer (catching up with Vodka as the beverage of choice amongst Russians!). According to the recently released Forbes survey of billionaires, Moscow has more billionaires (79) than any other city in the world (the closest is New York with 58) and Russia accounts for a third of Europe’s 300 billionaires, and 15 of the world’s 100 richest people. Not surprisingly, retail sales in Moscow now exceed Paris and London, and by 2025 the consumer market in Russia, which is now approx. 142 million, is expected to be larger than Germany’s, one of Europe’s largest markets.
The recent BRICS Leaders Meeting in China in April 2011 laid the tracks for greater “intra-BRIC” trade and investment co-operation in the years ahead. This is vital to the global economy and should be occupying the minds of all forward thinking business leaders and entrepreneurs.
With a combined GDP of $8.7 trillion in 2010, the BRIC economies already account for 45% of global economic growth, and the combined BRIC share of world trade increased from 6.9% in 1999 to approx. 14.2% in 2008. Furthermore, BRIC collective trade with the world increased almost six times from $790 billion in 1999 to $4.4 trillion in 2008.
Intra-BRIC trade, or trade among the BRIC members, has accounted for the fastest growth rate in global trade in the last decade, and is expected to continue as the BRIC economies become more dominant. According to the IMF, intra-BRIC trade, which is valued at more than $170 billion, has grown at the rate of 30% p.a. since 1999 and now accounts for 8% of global trade. During the 10-year period up to 2009, intra-BRIC trade increased nine fold compared to global trade, which only doubled over the same period.
In recent years, Intra-BRIC trade has been mainly characterised by Russia and Brazil supplying natural resources to satisfy the industrial and infrastructural needs of India and China. However, this is likely to change. Watch out for more investment and trade deals between the BRICs as they create their own trading bloc and invest in each other’s capabilities.
Strong BRIC Leadership
You have to admit that western style democracy is looking pretty sick at the moment! With hung parliaments all around the world, short parliamentary terms, continuous electioneering, disengaged and disgruntled voters, and career politicians looking after their own interests, the will to engage in structural reform and long term planning has virtually disappeared. It is not surprising that the west is in such a mess!
In contrast, the political systems of China and Russia (now with the prospect of Putin serving as President until 2024, having first been elected President in 2000) look remarkably strong, stable and effective, despite the way they are portrayed in the western media. And Brazil’s recent economic success can largely be credited to the successful 8 year terms of two reforming, pragmatic and popular Presidents, Fernando Henrique Cardoso and Luiz Inacio Lula da Silva.
The question now is whether India, the largest democracy in the world, will be able to remove the stifling influence of Government bureaucracy and consensus to allow their entrepreneurial culture to thrive. India’s growth rate of 10% p.a. would be much higher with decent infrastructure and less Government interference, and the hope is that India’s reforming Prime Minister, Manmohan Singh and his successors can be allowed to finish the job of transforming India into a modern economy.
With its young demographics, entrepreneurial flair, technological excellence and strong domestic demand, India will surely reach its true potential and demonstrate that democracy (famously referred to by Churchill as “the worst form of government except all those other forms that have been tried”) is still alive and well!
Here lies the big question for the BRICs to address….and for the US and the developed world to ponder. Will the next Steve Jobs be Chinese? Will Bangalore in India take over where Silicon Valley left off? Will Brazil become the world’s clean source of food, energy and transportation? Will Russia put the first man on Mars?
It’s too early to know for sure, but the BRICs benefit from “latecomers advantage”. The opportunity to leapfrog technological advances, capitalise on knowledge and past experiences, tap into existing networks and, above all, learn from the mistakes of those who have gone before. They also have the funds to spend on research and equipment which is rapidly running out in the west.
So, here lies the key to the future. As so eloquently put by Seth Godin in his recent blog entry, The forever recession (and the coming revolution), “the future is about gigs and assets and art and an ever-shifting series of partnerships and projects”. It’s not a zero sum game…we can innovate and they can innovate…the rest can be outsourced or ignored. Let’s fix the debt problems quickly, take the pain, start again and get on with the innovating! The BRICs will lead the way…we all must follow.
for Markets and Money
David Thomas is a BRIC Expert, Speaker, Entrepreneur and Thought Leader. He is a keynote speaker at After America: the Port Phillip Publishing Investment Symposium, March 14th-16th at Sydney’s Intercontinental Hotel. He blogs here.