The developing world has been a very good place for investment over the past few decades (at least up to 2008) because of something called catch-up growth. This is the phenomenon where poorly developed nations can import well-established technologies and methods from highly developed nations to rapidly improve their production efficiency by leveraging their cheap labor costs, thereby achieving rapid economic growth.
The BRICS economies are a good example of this with China and India leading the way (shown on the left). Even though economists have been over-optimistic (as always) and Chinese and Indian growth is now cut to 7.5% and 5.5% respectively for 2012, the economic growth in these highly populous countries is still quite remarkable and really is the only thing keeping our perpetual economic growth paradigm going.
For the long run, however, economic growth in these two powerhouses is set to fall significantly. Firstly, these economies will have to make the tricky transition from simply being the world’s production lines to becoming a more balanced economy with a rapidly growing middle-class (dodging the middle income trap). Secondly, China and India have become very much exposed to the self-imposed economic problems in the West and are now being directly affected. And thirdly, the sheer size of the Chinese and Indian populations puts very real environmental limits on the growth rates they can achieve going forward.
Of these three points, the final one is the most important in the long run. The fact is that, if the average Chinese were to consume like the average American, China would require almost the entire planet’s resources just for itself. India will soon have even more people than China, implying that further economic growth will be faced with even greater environmental restraints. And yes, according to the global footprint network, we already consume like we had 1.5 planets.
I really hope with all of my heart that China and India manage this fundamentally enforced slowdown well and keep on lifting many millions of people out of poverty every year, but unfortunately this slowdown does make Chinese and Indian companies less attractive. The exception once again is the green economy which will have to see massive growth if China and India are to continue raising the living standards of their massive populations. Fortunately, China seems to understand this because it is currently leading the world in clean energy investments.
The longer-term stock market outlook for the three remaining letters of BRICS – Brazil, Russia and South Africa – might be somewhat better because of slower levels of current growth, smaller population densities and remarkably rich natural resources. All three of these emerging giants still have significant room for catch-up growth and are working hard to overcome the political resistances stifling their development. However, as always, investors should proceed with caution and only invest in countries which they truly understand.