World economy & Emerging markets

The world is seeing a sea change in the balance of economic power. There is a clear shift taking place towards the emerging economies. Why do we say that? Let's look at the facts.



The world GDP is about $ 49 trillion (at market exchange rates) & growing at 4% in 2007. U.S is still the biggest contributor with 25% of the global economy at $ 13.5 trillion followed by Japan & Germany. However, the emerging economies contribute to 30% of the world economy at market exchange rate. If we consider the purchasing-power parity(PPP), then the emerging economies constitute more than 50% of the world GDP. On a PPP basis China & India would occupy the second & fourth positions in world economy. As against a growth rate of 3% of U.S, China & India are having a tearaway growth of 11% & 9% respectively. The emerging economies contribute to 50% of the world GDP growth, 80% of the growth in oil demand is accounted for by them & hold 75% of the world foreign reserves.


The emerging economies have grown 35% in the last four years from 2003 & in the same period the emerging capital markets have grown four-fold compared to only 70% growth of S&P index in U.S. Brazil market has gone up by a whopping 900% during this period & China & India have gone up by more than 500%(source: JP Morgan). Some emerging markets are showing signs of "altitude sickness". As i write this, Shanghai markets have dropped 20% from this month high. However, there are still no indications for a bubble burst. Brazil is trading at a forward P/E(price/earning) of 12.5, China & India at about 22 as compared to the U.S at 15.



The low risk markets in emerging economies are Taiwan, South Korea, Malaysia, Thailand with their P/E ranging between 11.5-14. Also they have current account surplus. India on the other hand has shown a lot of exuberance in stock market due to high liquidity. But 85% of foreign investment in India have gone to debt or portfolio management this year. Most of this is in speculative stock markets. With a current account deficit of 2% to GDP, India is in a precarious position if there is a flight of foreign capital. Having said that, the Central bank is doing an excellent job by being proactive in steering the economy with high growth & moderate inflation. China appears less risky with a huge current account reserve & a break even budget balance/GDP.

That brings us to the often asked question of "decoupling". U.S is still a huge economy. But the pace at which China & India are growing & there is no reason why they won't in the future, it's a matter of time down the future when the markets will decouple from U.S. If after 20 years someone asks you " when will U.S decouple from China & India", don't be surprised.