Beyond the BRICs: the 'Next 11' and even further beyond

ONE THE eve of my graduation (when I was supposed to be ironing my clothes for it), I opted to attend a talk by Jim O'Neill at my university. You probably have heard of him before, but he is the recently retired Chairman of Goldman Sachs Asset Management and the famous coiner of the BRICs acronym - the 4 emerging market giants of Brazil, Russia, India and China. Entitled ' The Changing World: an overview of dynamic and adapatable capitalism in a world beyond the BRICs', his talk of coure focussed on the BRICs but also shed substantial light on the 'Next 11' or 'N-11' - the 11 countries to watch out for as they make make their ascent towards wealth and full industrialisation, all with the potential of becoming the largest economies of the 21st century and the BRICs of tomorrow. 

These include:

The BRICs of tomorrow?

And notably, the 'MIST' (Mexico, Indonesia, South [Korea] and Turkey) nations make up 73% of the total of the N-11's GDP. 

For people my age and younger, it is all very easy to get excited about the BRICs, MISTs and the N-11 knowing that these nations will have increasing influence on our lives, no matter where we are in the world. The thing about emerging markets is that despite several commonalities, they are all different. The differ in area size, population size, rates of growth, patterns of economic reform, political, economic and legal regimes and styles of government which may pose as a threat or opportunity for investors. For example, you can probably tell from the word cloud that some N-11 members are far more industrialised than others already. 

South Korea aside (being an already highly developed nation), I believe that Nigeria, Philippines, Indonesia, Mexico, Turkey and Vietnam are the best positioned to grow into the largest economies over the next 30 years+. I have chosen a few countries to blog a some quick words about...

Nigeria, being the most populous nation in Africa and the 7th most populous country in the world, still faces huge challenges including poverty, some corruption, poor infrastructure and power supply among its 170 million people. However, for the past 6 years, the country has grown at an average 7%. Its large and young workforce means productivity won't be in short supply, attracting investment from both home and abroad. Sectors within each country grow at different rates and thus offer different opportunities for growth. Sector-wise, I know the food & beverage sector here is very vibrant at the moment and is projected to grow into the coming years, mainly driven by a wealthy middle class ready to consume with increasing disposable income. Energy is the hottest sector there (no pun intended), and still will be in the next coming decades with the oil and gas resources attracting international investments particularly as more state owned power and oil companies are set for privatisation. The banking sector is another industry ready for growth, having undergone extensive regulatory and restructuring.  

Whilst growth and attracting FDI or home investment is likely to be the top of the policy agenda for Nigeria's current and successive governments, I believe that solving the social and infrastructure related challenges faced by the country should certainly receive near equal status as part of the path to growth into an international economic force. 

Philippines, has an educated and young work force which I believe is a blessing given this characteristic cannot be replicated so easily in other countries also competing for investment and growth. Philippines is a strong exporter of electronic products, garments, petroleum products and fruits and they can continue to hold this status in the next coming years. Philippines, only very recently has become a popular destination for foreign investment given that its credit rating was raised to investment grade by Fitch and S&P not so long again. Bullish growth was a cause of this, but also due to President Aquino's rather successful bids to tackle corruption; now, there is a shift towards transparency creating more confidence among foreign investors. 

Corruption is still widespread nevertheless, and if Aquino and success governments can push for more anti-corruption measures and policies for welfare improvement, Philippines will see more investment and growth as investors tap into the work force and into the ever growing middle class. 

Indonesia, is a country I am often guilty of confusing it with the Philippines. These two countries have many commonalities but also a lot of differences. Indonesia is the world's 4th most populous country and has the largest economy in South-East Asia, with a growth rate of 6% per year. There is a thriving banking sector, with many local private equity and investor setting up, with more opportunities for growth in both banking and private equity well into the future.  The country has a large and young work force which creates an excellent source of productivity. Low wages in the country also make Indonesia an attractive destination for manufacturers  The most attractive point about the country is its 'open door' policy towards investment, where it actively welcomes investment and simplifying the legal framework (from the 1980s) to do so. Given that it is a democracy, it is also fairly easy to move money in and out of its borders (in comparison to China, for example). However, unlike the Philippines  the work force is not as educated and thus investors have trouble finding suitable management here. Therefore, should policy makers focus on improving its primary-tertiary education system, possibly modelling it on the Singapore or Filipino systems,  Indonesia could be become a serious magnetic force for attracting global investments. 


Vietnam, is an exciting place I feel as while it is a developing and generally agrarian economy, it is one which is shifting from a centrally planned economy into a more market orientated one. GDP growth is around 5%, and there is a lot of M&A activity and FDI in the country, particularly in manufacturing related sectors as suppliers seek a lower wage market as China and other Asian economies experience wage inflation. I expect Vietnam to be a major exporter of agricultural and food produce. As trade links improve with the rest of the world, the food and beverage industry could be a strong target for investors. Aside from the growth of manufacturing ( food processing, cigarettes, garments chemicals, and electronic consumer goods), I expect the tourism industry to grow as the Vietnam National Administration of Tourism is implementing a large scale diversification of the tourism industry to attract foreign exchange (as well as attracting more tourism). This sector therefore offering investment opportunities for local investors and those from further afield. Like several other N-11 members, Vietnam however faces the challenge of tackling corruption and providing experienced management due to its young population. 


With regard to Bangladesh, the country faces several large challenges that other N-11 countries do not face. Over population is the main issue which contributes to a largely uneducated country with widespread poverty. The tragedy of the garment factory incident and a general lack of regard for industrial safety reminds us that Bangladesh has a lot to do, although some action is slowly being taken. Time will tell if these actions are prolonged.  Out of all the N-11 nations however, Bangladesh has the one of the biggest opportunities to grow. Currently, although investment activity is nascent, there is growing interest in the country due to the large work force and the expanding economy (at more than 6% per annum) coupled with a growing middle class and their ever-growing disposable income. It is only ranked second to China in clothing exports, and will this industry will gain momentum into the future years as manufactures seek to move away from China into lower wage economies such as Bangladesh; it is one of the cheapest places to manufacture. 

There are high hopes of Iran and Pakistan as they are one of the largest producers of natural commodities in the world. Political and foreign policy challenges in both countries however will detract Western investors. Nevertheless, I believe we will see a thawing of relationships between the US/Europe with Iran and Pakistan over the next coming decades; Iran 's new leadership could pave a way for nuclear disarment and building a relationship with the US. As the 'war on terror' ends, Europe and USA could focus on strengthening a business and commercial partnerships with both countries. 

*****

Jim O' Neill's talk also made me think outside of the box a bit. What nations are beyond the BRICs and the N-11 to challenge the G7 of the world then? Will these nations be the emerging nations of the world when I'm spending my days playing bridge and bowling on greens?

This is very difficult to say many countries can potentially fit into this category and as for each country,  a whole host of social, political and economic factors and risks will come into force throughout my lifetime. At present however, to take a few, I believe Mongolia could fit into this category. As can Kazakhstan, Angola, Zambia, Botswana and Iraq. I've created a mind map of my thoughts as this post has been pretty wordy and long already. Take a look (click to enlarge)...

JH

The 2010s for Japan: comeback like Sinatra or lost decade round two?

The future: the volatile road ahead for the world's 3rd largest economy.

JAPAN, LIKE a phoenix rising from the ashes, ascended from its knees after the Second World War into one of the world's major economic superpowers and industrialized nations in a generation. By the mid 1970s - early 1980s, Japan had effectively 'caught up' with the USA and Europe technologically and economically, especially in its key export sectors of ICT, automobiles, consumer electronics and other heavy industry. Its conglomerates posed as a major threat and competitor to Western counterparts. But unlike its Asian neighbours of South Korea or Taiwan, Japan never fully managed to shake off the detriment of the bursting of the bubble in the early 1990s, the Asian financial crisis of 1997 and the collapse of semiconductor prices at the end of the 20th century. The fact that many Japanese firms are particularly dependent on the domestic Japanese market (such as firms in the telecommunications and semiconductor sectors) also exacerbates the problem for them. 

From an economics perspective, the central bank  - Bank of Japan  -  was partially to blame. Interest rates still remained high during the late 1990s and Bank of Japan's failure to lower the interest rate fast enough resulted in a liquidity trap - a cause of stagnation. In an attempt to stimulate the economy, Japan (unsuccessfully) during this period of time ran into large budget deficits on public works projects. Japan then suffered several episodes of deflation into the new millennium; the success of Bank of Japan's quantitative easing program which began in 2005 only proved to be short lived as far as GDP growth figures of the period show.

The 1990s, what was in fact an American decade, was the lost decade to Japan. The country, which exhibited miracle growth was now in a state of crisis and decline. 

Fast forward to 2013, little has got better for Japan overall. 

This week, Japan's economic woes has been hitting the financial press headlines again. At the beginning of the week, the Bank of Japan after a 2 day meeting announced that it will implement no new quantitative easing, other monetary policy tactics or offer bond buys. Disappointed and left volatile, the Nikkei fell 6.5% entering a bear market territory while global markets also responded negatively to the news; markets were further not convinced by Bank of Japan's governor Kuroda's insistence that growth is coming and that no imminent tool is needed as a result. The yen rose nearly 2% against the dollar. It seems to me that Japan's lost decade is far from over. 

Could 'Abenomics' give Japan a comeback like Sinatra? 

PM Shinzo Abe, who came into power last year, is an advocate of going 'all out' to stimulate economic growth, private investment and battle the Japanese economic plague that is deflation.  His vision, consisting of the 3 arrows approach -  dubbed as 'Abenomics' -  involves the Bank of Japan playing more of a monetary policy role. It is also entails more fiscal policy moves including heavy government spending and the Bank of Japan engaging in aggressive  asset buying. The third arrow involves structural reforms, seen as the foundation to Japan's comeback. Abe believes that the mobilisation of an aggressive monetary policy and fiscal policy will stimulate growth, triggering a round of private investment into plants and people. In turn, expectations of growth and prices will start to rise, successfully combating inflation. 

Since a landslide victory in November 2012 that resulted in Abe becoming Japan's 6th leader in 7 years, Abe has been following through with what was on his manifesto. He forced through a 10 trillion Yen increase in government spending on infrastructure  healthcare, education and other spending- this is believed to boost Japan's growth by 2%.  This week, Japan's cabinet is voting on the '3rd arrow policies' under 'Abenomics' involving income raises, attracting foreign investment and a reduction on investment tax to help companies boost their capital spending. 

But, the Bank of Japan's actions, or rather, lack of actions this week does not concur with 'Abenomics', casting some doubt on whether 'Abenomics' is actually plausible in reality. 

Of course, it is too early to judge the long term effects of 'Abenomics' and whether any growth (such as the 1% growth of Q1 2013) is here to stay. 

Looking holistically, the Nikkei has gained more than 70% since mid-November and the Yen lowered by 22% to the dollar and the euro. Also in this time period, the difference in yields between 5-year Japanese government bonds and their inflation-indexed equivalents has increased by over 1 percentage point. This could be indication that Japan is on an overall path to growth and inflation, leading to a rebound in consumer spending, hiring and other private investment.  Further, earnings predictions for Japanese firms are higher than compared to 6 months ago, but only based on the belief that Japan's GDP figures will continue some form of growth. 

For the Japanese economy, inflation is good news. There has been a surge of inflation in recent month, but this is actually driven wholly by a planned increase in consumption taxes that will begin in 2014. Similarly, data from the Tokyo Stock Exchange shows that the Japanese have been selling shares to foreigners for months. For me, this would say that any inflation/price increases is due to foreign demand and not changes in the the portfolio allocations of Japanese savers. 

Another point to suggest that there has been no real economic progress (since Abe's election) is that Japanese households and firms, who own more than $6.7 trillion worth of non-Japanese assets (37% are bond investments), are not moving their money out of these foreign assets into domestic ones. They would surely do so if Japanese savers genuinely believed that Japan's prospects had improved. A lack of investment by foreign investors in Japanese assets is also a sign that Kuroda and Abe are not convincing many. 

To me, Abenomics has not made a modest reversal, but a minute one. This is because what is needed is more fundamental structural changes to the economy that accompanies aggressive monetary and fiscal tactics to pull Japan out of a lost decade, such as:

•  Public sector debt. Japan’s ratio of government debt to GDP is around 2.28 (and increasing), the highest out of all the industrialised nations by far. To put into perspective, it is almost double that of Greece and Italy. Further, the combined costs of interest on debt and welfare are equal to total government tax revenue. Reducing its public debt can spark some consumer and business confidence. Raising tax is not a good option but Abe believes that economic growth as a result of 'Abenomics' can make public debt appear more manageable. Impression management is no good - it is the doing that counts. 

• Demographics. Japan's working age population has shrunk every year since 1995. Because working age people are the biggest spenders, an ageing population has inevitably reduced overall demand in the economy. A vicious but not virtuous cycle appears - the lower retail sales lead to businesses engaging in cost cutting (common in  Japanese firms) which lead to lower wages and lower prices. Japan can begin by boosting the work force such as creating incentives for more women to re-enter work after employment, encouraging more marriage and couples to have more children or relaxing its immigration policy; immigrants can also change expectations of growth and inflation.

• Deflation mindset. As well as the above, Abe has the challenge of convincing inflation expectations beyond financial markets and into households and firms; many agree that there is a deflation mindset in Japanese households and businesses who all hoard cash and other assets rather than spend.

Japan may not have a comeback like Sinatra in this decade, nor perhaps the next. But there is a sense of optimism about Abenomics, and this, coupled with some fundamental structural changes, Japan can steer itself back on to the road to growth. This needs political will. In the mean time however, Japan is still trapped in a lost decade. 

JH