In 2011, even though major stock indices like the S&P 500 rose, volatility in the U.S. stock market caused uncertainty, and many risk averse investors wondered if they should cash out their stocks. A lack of financial funding kept small businesses from growing and adding jobs to offset the loss of over 8 million jobs in 2008-2009. Older workers who would have preferred to retire returned to work in lower paying jobs in order to make ends meet. Large corporations made more money while paying the lowest corporate tax rates in history. And for the first time public employee layoffs are occurring as city, county, state, and federal governments reduce spending in deficit reduction programs.
Globally, the European Monetary Union continues to struggle with debt management issues in Greece that have spread from Greece to larger economies like Spain, Ireland, and Italy. China is being pressured to raise the value of its currency and Middle East oil disruptions are adding to global uncertainties.
A common question being asked in this economic slowdown in the U.S. and Europe is how will the global economy ever recover? Austerity agreements are being softened but newer pro-growth proclamations focus on avoiding clearly negative growth paths. In such uncertain times a better question is where will the global economy grow outside the U.S. and Europe and provide practitioners with opportunities over the next five years (2012-2016). The answers do appear to be in the Emerging and Developing Economies.
Growth Ahead in the Global Economy
We begin with an assessment of the state of and prospects for the global economy from 2009 through 2016. According to the data presented by the IMF this past September, before the euro crisis worsened, World GDP is projected to grow at an average rate of 5 percent with Emerging and Developing Economies as well as Developing Asian Countries having more robust growth than Advanced Economies and the Euro Area. The size of the GDP of the global economy was $57,722.09 billion in 2009 and will grow by more than $33,853.33 billion over the next five years. In the IMF assessment Advanced Countries include the United States, European Union, Australia, and Japan. The Emerging countries include Brazil, Colombia, Hungary, Liberia, Philippines, South Africa, and Thailand among others. The Euro Area countries include Austria, Italy, Germany, Slovenia, Spain, and Greece.
In the following, Table 1 and the Figure 1 chart show the dynamics of the global economic growth. As can be observed in the charts below, in 2009 Advanced Economies had a total GDP of $39,617.07 and accounted for 68.70 percent of the World’s GDP. In 2016, this percentage is forecasted to decrease to 58.61 percent of global GDP. Within the Developing Economies group, Developing Asia, Latin America, and the Caribbean as well as Commonwealth and Independent States are the ones that are expected to increase their GDP share the most (6.35%, 1.15%, and 1.62% respectively).
Table 1: Shares and Dollar Amounts of Global GDP by IMF Groups 2009-2016
Figure 1: Annual Percentage Growth GDP Growth by IMF Groups 2009-2016
When an assessment is done on national economies within the Emerging Markets, changes can also be seen between 2009 and 2016. The largest Emerging Countries have positive but lower growth rates. Average economic growth in the BRIC (Brazil, Russia, India, and China) countries will decelerate to 6.1 percent next year from a high of 9.7 percent in 2007. This will eventually mean that the focus of capital markets will move to other parts of the world. For practitioners this raises the question of how to identify countries that provide the best growth potential in the next few years? As Adrian Wooldridge states, when researching for new opportunities, start with “overlooked” countries that have potential development rates equal to or above the BRICs and “frontier” countries. Overlooked emerging economies include South Africa, Algeria, Morocco, Saudi Arabia, and Indonesia. Frontier countries are poorer and riskier, like Nigeria, Bangladesh, and Sri Lanka. Early entrants to markets will bear more risks but also the best opportunities for first in (early in) rewards.
Even though the Middle East and North African region’s economic growth is highly correlated to commodity price movements and social and political stability, the Algerian economy is likely to experience 3 percent growth during this year as public and private expenditures increase in non-oil sectors, according to the IMF. Furthermore, gas exports are expected to increase by almost 50 percent in the next five years and new exploration and infrastructure projects make this sector’s outlook incredibly promising if oil prices remain at or near current levels.
Not too far away, Sri Lanka is showing its own signs of progress. According to Bloomberg, Sri Lanka’s economy is expected to grow at a record pace of 9 percent, which would be the fastest since 1950. This year will be one of post war consolidation and growth for this economy; but a reduction on its trade deficit is a must for real economic success.
Latin America and the Caribbean region will also continue to be an attractive sector for businesses and investors as growth continues. Even though this pace has begun to moderate for most economies and the returns will not be as attractive as the above mentioned countries, this area should not be completely ignored. For example, Colombia’s economy is experiencing great momentum from infrastructure spending and foreign direct investment and this year GDP is expected to expand 4.5 percent.
As is always the case with these countries, policy risk and political stability are main considerations for businesses when trying to enter these markets. Some of the main risk factors are currency instability, corruption, weak government institutions, and unreformed financial systems. It is up to businesses to have an effective risk management strategy because awareness of political risk will not be enough.
Some companies have already started to recognize the potential in these markets. For example, 57 Stars is an Independent Asset Manager which focuses on investing primarily in emerging countries and it has helped several companies like Guardian Life Insurance enter these markets starting in May 2011.
In a recent interview John Engel, VP of 57 Stars, noted that“Emerging countries are experiencing the growth of a large middle class of consumers with new needs and demands. Therefore consumer-facing companies, as well as other industries whose growth is highly correlated with increases in disposable income, like healthcare and education are likely to succeed in these new markets.” From a private equity perspective, the most significant opportunities stem from limited funding which has restricted expansion in promising industries like healthcare and biotechnology.
Mr. Engel also points out that the major risks facing emerging countries derive from the uncertainty in the Euro Zone and the possible economic slowdown in China. Both could have serious contagion effects. Also, because these economies heavily rely on natural resources, a downturn in commodity prices due to decreased demand from China, especially for countries in the Andean region, could be detrimental. World Trade Executive concurs with Mr. Engel that Brazil, Columbia, Chile and Peru are top investment candidates in the next five years because they are expected to experience continued growth driven by strong domestic consumption supported by government fiscal and monetary stimulus programs.
It is important to point out that not only medium and large-sized companies are able to succeed in emerging markets. Specialized small businesses (with 500 or fewer employees) have potential advantages over larger, more established companies because they can adapt more quickly. An example is Princeton Healthcare, Inc. (PHI). Based in Atlanta, Georgia, PHI is a service firm that exports financial advisory services to medical equipment manufacturers and healthcare organizations. This 10-employee company is successfully capitalizing on the current demand for quality services in emerging countries. According to Don Williams, PHI’s CEO, “Small companies can be successful because they are better positioned to enter these markets, can be more responsive to customer demands, and are better able to navigate and compete”. PHI was a first mover in an emerging market which gave it “first-mover” advantages.
On the same note, Ceilings Plus, a Los Angeles company with 160 employees that manufactures and installs high quality aluminum and wood ceilings and wall panels, has grown to have $30 million in annual revenue and according to its owner, “55 percent of sales come from Europe and the Middle East.” For Ceilings Plus, partnerships and relationships have also been crucial for understanding and successfully penetrating international markets. Partnerships allow businesses to leapfrog competitors that come along later. These partnerships can also help close the gap on local cultural ignorance and provide local representation. The U.S. Commercial Service offers Commercial Guides and the Commerce Department offers Gold Key services to help with the search for partners.
As previously mentioned, policy risk can be hard to hedge against, especially for small businesses. Legal contracts and insurance sometimes are not enough. There have been cases in which politicians have decided not to honor contracts or have created new laws to get around them. Also, insurance coverage is very limited when it comes to policy risk. This situation need not discourage entrepreneurs from entering these markets, but should provide strong reasons to thoroughly understand the environment and implement appropriate strategies to manage risks and justify investments.
The global economy is open for business—practitioners should be looking to emerging and developing countries. This does not mean adding jobs in other countries, it means creating jobs in the U.S. to produce goods that growing economies are asking for but find in short supply. For example, single serving consumer products, healthcare products that improve heath and are already stated priorities of national health programs, construction equipment and services for infrastructure projects like airports and highways, and inexpensive tele-communication products and services are all candidates. Adding U.S. jobs to expand exports is sometimes referred to as “reverse immigration.” As Kathleen Brush, Ph.D., author of Leadership = Motivation = Innovation + Productivity: Get Ready for the Latest Global Challenges states, “Investing in emerging countries will translate into growth of the middle class in those countries, and that, in turn, means growth of markets for U.S. businesses. We need to recognize that the U.S. is slowly recovering. Unemployment is down to 8.3 percent and “reverse immigration” from global business ventures could further decrease unemployment.”
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