The world has been pretty chaotic in the aftermath of the world financial crisis of 2008 with global growth, slowing down, and economic recovery being the slowest since World War II. In addition to that, in the information age we are bombarded with data, statistics, opinions all of which tend to make the picture blurrier than clearer. Ruchir Sharma, a professional investor and market strategist at Morgan Stanley, from his constant travels to different parts of the world and meetings with key policy makers, politicians and fellow citizens tries to simplify the dynamism contained in the rise and fall of different nations and gives a ‘practioner’s’guide for key trends to look at in the short term i.e. in a span of next 5 to 10 years as a roadmap to estimate which countries have potential for high growth and which do not. As Sharma states in his prologue, to be relevant in a world shaped by the global crisis of 2008, “disrupting trade and money flows, unleashing political revolts, slowing the global economy, and making it more difficult to discern which nations would thrive and which would fail in such a transformed landscape”, it’s important to filter out the noise and pick up clear signs at what’s really happening on the ground.
Sharma often emphasizes his focus on next 5 years or so and not longer than that because too long a forecast can blur estimates and probabilities and it’s less practical because it doesn’t give an idea about what should be done in the present moment. In order to take investment decisions in the present moment, he offers key pointers and trends, backed up by facts and data that simplify your vision and give an idea of the tell-tale signs that often hint at where a country is headed as far as economic growth outlook is concerned.
1. PEOPLE MATTER:
Demography is a thing that often gets overlooked in discussions of growth of nations. It’s a necessary but not sufficient condition for high growth. And we don’t seem to give importance to its dynamism as much. Fertility rates almost all around the western world have been on a decline. In over 30 countries in the world the dependency ratios have been on a constant upturn. In a demographic sense, economic growth has two drivers, the absolute amount of labour force, and its productivity. And with declining labour force all but a few underdeveloped countries, growth is bound to hamper.
2. LEADERSHIP:
A country’s political environment, often shaped by its leaders, is a key indicator of the the general societal trends in an economy, and, Sharma points out that it has been observed that in the first 2 terms of a leader’s tenure in office, the economy tends to outperform in the stock markets. That’s the period when the most rigorous reforms are made and policies undertaken; whose quality and intensity seems to fizzle out in the later terms. The longer the leadership stays, lesser the impact.
3. GOOD BILLIONAIRES, BAD BILLIONAIRES:
Billionaires can be of two types. One, which are an outcome of healthy entrepreneurship and building of productive capacity that improves wealth not only for the billionaire but also for the society at large. Examples could be the rise of Alibaba, tencent, etc. in China. Others are billionaires, who ramp up wealth centred on extraction of monopoly resources, such as energy, mining activity and through political ties. These actually widen the wealth gap in the economy, and can potentially throw the economy out of balance.
4.DE-DEMOCRATISATION:
Till over 2006-07 most major economies had a democratic government. But more recently, democracy has been on a decline giving rise to more populist/nationalist leadership. Examples include Turkey, Russia, etc. But there is a general anti-establishment wave sweeping around the world as well. E.g. Brexit was as much a revolt against establishment as about the core issues at hand.
5. DE-GLOBALISATION:
Since the 2008 market crash, it has been observed that global trade has decreased more than the global economic growth and that too, in spite of not being in a recession. Capital flows have slowed down. Banks do not favour lending between borders, which is an important requirement for emerging countries such as India.
6. KISS OF DEBT:
The financial crisis was seen to be caused by build-up of too much debt, and more deleveraging was expected in that respect. But what has been seen is that debt has grown even larger in the recent years. China’s debt has also bloated up because of its ambitious growth targets; highest in any emerging market. Bad debt can cause market instability and eventually the banking system to choke.
…….”to be fit to rule, the prince must be able to hear that which does not make a sound”…….
Ruchir Sharma is the Head of Emerging Markets and Chief Global Strategist at Morgan Stanley Investment Management. He regularly contributes articles to the Wall Street Journal, Financial Times, Foreign Affairs and other publications.