Morgan Stanley emerging markets guru Jonathan Garner says the days of a U.S.-centric world are fading fast
The debate over whether emerging markets are decoupling from the US continues to rumble on. With the US economy slowing and probably heading into recession, the debate is of particular interest at this time. Here Jonathan Garner, managing director and head of global emerging markets equity strategy with Morgan Stanley, explains why he thinks that emerging markets will weather this slowdown far better than in previous US slowdowns.
What are your main reasons for arguing that decoupling is under way?
The emerging markets are now 30% of the global economy at current exchange rates. They are even larger now than developed Europe and their share of global GDP is steadily rising and will continue to rise, I suspect, for the foreseeable future.
Also emerging markets have demography on their side. The emerging world's working age population will increase by another one billion people between now and 2050. The developed world's working age population will shrink by about 120 million—or about one eighth, whereas emerging markets will rise by about 25% from the current level. This and the adoption of the market economy, urbanisation and other profoundly positive trends will keep emerging markets moving forward.
How rapidly is this process moving?
I would say we are exiting the US-centric world pretty quickly. And if we are right about this, emerging markets will contribute over 60% of global growth this year. Last year they contributed about 48%. China alone is contributing more to global growth than the US now and will do so for the foreseeable future. China contributed about 11% last year and will contribute 12% this year. This process is slowly bringing down the global share of US GDP while the share of emerging markets is steadily rising.
The decoupling argument seems to have plenty of sceptics
Decoupling runs against the consensus view. Some people simply don't buy it and don't understand the profound change that is underway. And most people still have this view of the US as the core and emerging markets as the periphery. If you go back to the 1990s that was true to some extent—the core drove the periphery—but that was when you had small emerging countries like Hong Kong, Singapore and Thailand that were exporting to the US. It's very different when you have got really large population emerging market countries adopting a market economy. When that happens their growth really starts to kick in.
How is it different this time?
Some things are happening that don't usually happen in a US recession. Export growth in emerging market countries is still running at 19.9% year-on-year. Look at the last US recession, which began in Jan 2001: Then Emerging Markets export growth plummeted. The reason for this difference is that the US is gradually becoming less and less important. Since 2001 there has been a huge gain in intra-emerging market trade and a huge decline in the share of exports from the emerging markets to the US. As an end-user market the US now takes less than a fifth of emerging market exports. And the biggest growing element is trade with the emerging markets and after that trade with the EU.
How is this reflected in product categories?
If you look at auto sales for example, in China alone they have grown from two million units in March 2002 to 7.5 million December 2007. Auto sales in the Bric countries (Brazil, Russia, India, China) totalled 14 million units in 2007. That's 88% the size of the US market and they are growing at 20% year-on-year which means that within a year the Bric counties will have larger auto sales than the US. If you go back to the last US recession in 2001-02, the Bric countries had auto sales that were less than one-third the size of the US. If you look at the auto sales to population densities—this trend definitely won't stop here.
Are the any other areas where growth has been strong?
It's also true in areas such as personal computers—not an area where you tend to think about decoupling. Back in 2001 the US was twice the size of the Asian market ex-Japan, while in 1998 it was three times the size. Today it is scarcely larger.
It is happening in even smaller ticket items such as mobile phone handsets. The US and Europe together take less than one-third of global handsets. In the last US recession it was more than a half. The vast majority of handsets these days are sold into the emerging markets.
What about spending on infrastructure development?
Infrastructure is very important. We have tried to estimate infrastructure spend and gross fixed capital formation and then looked at the proportion of that that which goes to infrastructure. We reckon that the 29 emerging markets countries that we have modelled will have about $22 trillion over the next 10 years. So rising from about 2% of global GDP in 2008 to about 3.5% of global GDP in 2017. That's a very major improvement and it's a structural driver of global GDP growth as we expect it to be growing faster than overall GDP growth.
How is this spending going to be financed?
It can be funded because the emerging markets countries have got their house in order economically. They are running surpluses and their public sectors are external creditors not debtors. The big debtor is the US. The public sector even in places like Brazil and Mexico is now a creditor. Its gives them huge scope to engage in infrastructure building and at the governmental level almost every emerging markets country has drastic infrastructure spending plans across a whole range of sectors. These include airports, power stations, power stations, property, and railways. It really is a far bigger and probably far longer investment theme than the housing problems in the US right now. People find it hard to get their mind around it right now because it crosses many countries and involves a lot of different sectors.
So do you think a slowdown in the US is going to have much impact on Asia?
Well it will have some—we are expecting a growth deceleration. It would be foolish to argue there would be no effect. But we think it will be quite limited. Much more so than in previous US recessions. Because emerging market countries are no longer just exporting to the US. They are exporting to the EU and to each other to feed their own end-use consumers.