When you think about strong economies, the US is probably one of the first which comes to mind.
And you would be correct.
By and large, the US is seen as the world’s most important economy. This status quo started developing since the end of the American Civil War around 1865.
The US GDP skyrocketed largely due to industrialisation, such as the booming railway and manufacturing businesses as well as vast oil discoveries.
Is the US still the most important? I don’t know, and maybe the world won’t find out until the next crisis. But it remains one of the largest and most developed economies.
Once an economy is developed, a more natural growth rate forms in terms of immigration, world growth and population.
For large developed economies, we’re happy to see GDP growth around 3%. In fact, here in Australia that’s what the Reserve Bank of Australia (RBA) targets as sustainable growth.
Yet in emerging markets, growth rates of around 8-10% are common.
What do these faster — and more volatile — economic booms translate to in the market?
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Just look at Argentina, which rebounded its GDP from -1.8% growth from 2016 to 2.9% in 2017. This is a growth in its market by over 200% since the start of 2016.
This means an investment in a broad Argentinian market tracking index could have tripled in value over this time.
If you can get into an emerging market early, these types of gains are not uncommon.
So, let’s get to it then. Here are five emerging markets to look out for in 2018.
According to the UN, India is set to become the world’s most populous country by 2022.
The country had a population growth rate of 1.18% in 2017, compared to China with 0.43%.
India’s GDP grew a strong 7.7% year-on-year in the first three months of 2018, compared to 6.8% from China. By these metrics, India is well on the way to eclipsing China in terms of economic output.
The country is not without its problems though with overpopulation, poverty and a lack of infrastructure spending all posing significant issues.
In recent years, India’s Prime Minister Narendra Modi has facilitated economic reforms surrounding the liberalisation of direct foreign investment policies, particularly around the manufacturing industry. This has allowed more money to flow into the economy, pushing the country toward the goal of becoming a manufacturing hub.
Tax reform has seen the number of completed income tax returns increase by 25%, with advance collections increasing 42% all on the back of the black money crackdown. The government demonetized the 500 and 1000 rupee bank notes to curb corruption almost overnight.
This unique political environment has allowed India to take many sharp political and economic turns, and yet India’s economy is showing no signs of slowing down. Although there’s a lot of work to be done, there’s huge scope for taking advantage of this growing market.
Low-cost manufacturing played a central role in making China the behemoth it is today.
Yet rising manufacturing costs have come as workers begin to demand higher wages and prices increase with the trending commodity prices, leaving room for more competition in the Southeast Asian manufacturing market.
In comes Vietnam.
With a more stable political environment, significantly lower wages and the close proximity to China, many Vietnamese companies are crossing the border to set up shop.
The Asian Development Bank puts Vietnam’s GDP growth at around 7.1% for 2018, the highest recorded for the country since 2008. The growth has been driven mostly by foreign direct investment, rising domestic consumption, expanding exports and an improving agricultural sector.
As a large exporter, the country is at risk of large exposure to any downturn in trade resulting from souring relationships between developed nations (looking at you, US) and political conflicts in the Asian region.
That’s the theory. The US’s retraction from the Trans Pacific Partnership was expected to make a large impact on Vietnam’s trading economy, yet in reality it was barely a blip as foreign investors still flocked to the country for its abundance of labour and resources.
Vietnam’s Prime Minister Nguyen Xuan Phuc claims the current growth will extend through to 2020 by giving firms more room to grow and driving change to rural areas.
This is an important statement considering the private sector makes up for around 43% of the nation’s GDP.
In many ways, Brazil is a study of how not to develop a country.
The country is a commodities powerhouse: a world leader in coffee, sugar, a major source of industrial metals, and much more.
Yet, the Organisation for Economic Co-operation and Development’s (OECD) recent figures placed the country’s 2017 GDP growth around 1%.
It’s not a bad result considering the country was in recession between 2015 and 2017. But when you consider that Brazil was spending 16% of its 2016 budget on interest payments for government debt, (held mostly by investors, businesses and the upper-class) the result was not so positive.
The interest payments were second in the budget for social benefits, mostly comprising of pensions payments. It’s not a great way to stimulate the economy.
That said, Brazil has a competitive advantage in aircraft and auto manufacturing, as well as a wealth of raw materials.
The country stands to benefit from an uptick in inflation in the coming years, which should prop up commodities prices.
If you’re one to believe in rising demands for commodities, and the potential for other developing countries to ramp up production and look to import the necessary materials, Brazil is a logical marketplace to watch for growth in this area, especially off the back of its recently low performance.
In recent decades, Chile has become one of South America’s fastest growing economies and the largest supplier of copper in the world.
The country has seen plenty of economic progress in terms of living standards, with poverty levels reduced from 26% down to 7.9% between 2000 and 2015.
Following reforms in economic freedom, tax, democracy, and law, Chile has been rapidly progressing as a nation, and it is on its way to becoming the first fully developed Latin American country.
There are many aspects of Chile that make it an exciting and promising market, including a low corporate tax rate, high political and economic stability, competitive labour costs and a growing technology scene.
In fact, it’s the latter point that makes Chile an important country to watch.
Currently, the country is fighting for the top spot in the Latin American tech scene and is taking great leaps in fostering the ecosystems of technology start-ups — successfully seeing a 35% growth within the last 18 months.
Coupled with its high standard of living and comparably low cost of living, Chile is becoming a highly attractive start-up base for new technology companies.
Although Chile’s growth has dropped off in recent years, the economy is expected to recover during 2018-2020 as the private sector expands and commodities prices rise.
This makes Chile a fascinating economy to watch.
5. South Korea
In late 2017, the South Korean market was looking largely uncertain.
Tensions in the north were rising, and the political instability between North Korea and the rest of the world was exacerbated by the souring relationships with China and the micro-twitter war between Kim Jong-un and Donald Trump.
As we know now, these tensions have largely abated.
South Korea has a population of 51 million in a geographical area not much larger than Tasmania. Yet despite its size, the country is the sixth largest exporter in the world, has a strong equities market, and is well recognized as a hub of developing technology.
The country is home to some of the world’s leading suppliers of smartphones, integrated circuits, cars and ships.
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It’s also a nation of low governmental debt and low unemployment.
At this point you may be questioning whether South Korea is really an emerging market, and you’re right to question it.
The verdict is out on whether it should be classified as developed, and it seems like only a technicality is preventing such a classification.
Regardless, the country offers a dynamic environment for investment, given its competitive advantages in the global marketplace of technology exports and the developing political stability in the region.
China remains the top export destination of the country, with the second being the US at close to half the value.
The MSCI Korean index has recorded an average of 14% return between 2009-2017, outperforming most developed and emerging markets, and recording the third highest emerging markets equity returns in 2017 at around 47%.
And the country is showing no signs of slowing down.