By Sam Goh

The aftermath of the global financial crisis has brought contrasting signals between developed nations and emerging economies. While emerging economies experienced much sharper contractions than the developed countries during the crisis, they also experienced much stronger rebounds. Despite the recent Euro zone debt crisis and the US structural problems, a number of developing countries are already back at their pre-2007 levels, while others are gradually recovering. In particular, the BRIC economies have displayed remarkable resilience during the global financial crisis. Between 2000 and 2010, the BRICs contributed almost 35% to global growth in US Dollar terms, compared with around 16% in the previous decade. In particular, since 2007, China alone has contributed more than any of them.

Since the start of the financial crisis, the BRICs’ contribution has risen even more: some 48% of global growth has come from the BRICs, up from 25% in the first six years of the decade2. The contribution from all emerging markets as a whole was over 80% (vs. the 2000-2006 average of 45%)3. While global growth from 2000 to 2007 was almost equally split between the developing and developed world, the last four years saw the trend change drastically, with the divergence mainly driven by the BRICs and the other emerging economies.

Increasing trade shares

The BRICs’ share of global trade has continued to rise sharply. In this case, China accounts for almost two thirds of the BRICs’ share. Korea and Mexico together account for more than half of the rest of emerging economies’ trade (Exclude BRIC), while other countries (such as Turkey, Indonesia and Vietnam) are becoming increasingly important too. The importance of this group in 2008 has increased even more, highlighting the resilience of the developing world to the crisis in general. This presents tremendous amount of investment opportunities for investors into these economies in terms of commercial trade and shipping etc.

Internal Consumption

Internal consumption is still the largest component to real GDP growth in most of the emerging economies. For instance, in China, both net exports and internal demand have made positive contributions to growth this decade. Contribution from domestic demand declined across the board in 2008 from the 2007 highs. However, this was still the main economic driver for all the emerging countries. On a broader perspective, domestic demand has also consistently driven growth in many economies. Some countries such as Indonesia, Mexico and Vietnam stand out in particular. When compared against the developed economies, it revealed a striking difference, particularly versus the BRICs. The contribution of domestic demand to growth in the North America and Euro land had slowed since the start of 2003 and registered negative figures in 2008 and 2011 during the global financial crisis and most recently, the Euro zone Debt crisis respectively.

Given the challenges (exports) that many emerging economies and markets have faced during the crisis, has their potential to grow and develop changed? In this article, we will look some of the critical components of the emerging economies so as to give an objective assessment on the investment opportunities available. The general assessment is that not only is the emerging economies’ growth story still intact—if anything, it has become even stronger.

BRIC’s Growth Story Continues to Remain Intact

Ten years after investment firm, Goldman Sachs, first coined out the BRICs’ growth story, all four countries have registered upside surprises. From 2003-2011, actual GDP growth turned out to be higher on average than projected, particularly in China and India. Even if we take into consideration the financial crisis, actual GDP growth is still significantly higher in China and India, and slightly higher in Brazil. Since 2008, China has been delivering a much higher average growth rate than many moderate economists had projected. Higher growth assumptions for Brazil and Russia have also been factor in for assessment over the next decade.

According to Goldman Sachs, China, the US and India could be the three largest economies by 20154. At the same time, Brazil and Russia could overtake Japan and Germany to become the fourth- and fifth-largest economies by 20505. In terms of income per capita, Russia will still probably be the richest economy out of the BRICs, with China, Brazil and India well behind it by 20506. Overall, the BRICs economies taken together could now be larger than the G7 developed nations by 2031, much earlier than anticipated.

Ever since the BRIC theme was identified, a number of fundamental shifts has been noted in relation to the rise of these countries could bring about in the global landscape. For example, the changes in consumption and production patterns resulting from the rise of the BRICs could be dramatic. Spectacular growth in demand for consumer durables goods such as cars and mobile phones in China is another good example to illustrate the above point. All these point to potential investment opportunities available for investors who are keen to take advantage of the emerging economies growth story. 1,000 people. This is over 100 cars per 1,000 people higher than we estimated before, and 30 times its current penetration level9! Hence, India is set to become the biggest auto market among the BRIC economies by 2030. At the same time, automobile projections for Brazil also reveal higher car penetration. This is projected to be around four times the current number. All in all, demand in auto mobile products and services in these emerging economies will present attractive investment opportunities for investors seeking portfolio diversification and capital appreciation.

Buoyant Energy Markets Spurred by Demand

In addition to global auto mobile demand, another investment opportunity that an investor should look at in the BRIC’s growth story pertains to the main and alternative energy markets. Just as with auto mobiles, China and India will be the two main players in the energy market. It looks likely to be influenced greatly by Chinese and Indian demand within the overall picture over the next 20 years. Over the past few years, the energy markets are often dominated by the policies adopted by the Chinese government. For instance, on November 26, 2009, Reuters cited a Xinhua report (quoting the State Council) that by 2020 China plans to have reduced its carbon intensity by between 40% and 45% compared with 2005 levels10. On a separate note, China has pledged to reduce energy consumption per unit of GDP by 70%-80% by 2050. To achieve this goal, 50% of new energy usage from now until 2030 will come from nuclear and renewable sources, and that all new power sources will be in these forms by 2050.

However, the picture becomes interesting when one applies to the use of non-renewable energies. Let’s take crude oil as an example. As discussed earlier, 50% of new energy needs by China will be met by renewable resources by 2030, and that all of them will be by 2050. If this is true, then up to 15mbpd of the possible projected 75.2mbpd globally might not take place. Thus, 20% of projected global oil demand from China may not occur. If India were to engage in something similar as China, then 35mbpd or 46% of the additional energy demand that was being projected earlier would not happen.

All these indicate that investors could turn to alternative energies for potential investment opportunities. According to Goldman Sachs’s analysts, while the Chinese policy indications appear to be good news, unless they can be implemented quickly and without something dramatic involving the US, the near to mid-term lack of energy supply suggests significant upside price risks remain, which could lead to weaker demand (through weaker growth).

Conclusion

The global financial crisis has been a major challenge for the world’s economies. At present, the ongoing Euro zone debt crisis as well as the US structural issues are two main determinants that may possibly put a dent to global economic growth. As discussed earlier in this article, the emerging economies collectively appear to have withstood and handled the crisis better than many of their developed-nation peers (G7). In fact, their overall contribution to the world’s economic activities has increased even more through the crisis. Therefore, it is likely that in the present context, the global economy may turn to emerging economies like BRICs for growth in the short, medium and long term. If this holds true, some of the emerging economies like China will become as big as the US by 2025. It is projected that the BRICs will collectively become as big as the G7 by 203012. Hence, among many aspects of the world economic scene and uncertainties, the emerging economies are expected to become increasingly important players in propelling global economic growth. With hindsight, many complexities and structural issues may arise in the future as a result of it. However, the general norm is that the emergence of these developing countries remains very attractive and offers substantial investment opportunities for investors.