Urbanization sweet spots
It’s a hard slog sometimes looking for new and surprising sources of global economic growth that have not already be heavily discounted by global investors, especially in the uncertain world of 2012. It’s been as hard of late to find new arguments to invest in China and quite a few people suggesting the opposite.
But a Credit Suisse report out on Tuesday homed in on worldwide urbanization trends to find out where this well-tested driver of economic activity was likely to have most impact int he 21st century. For a start, the big aggregate numbers are as dramatic as you’d imagine. More than half of the world’s population now lives in urban areas, crossing that milestone for the first time in 2009. And, accordingly to United Nations projections, urban dwellers will account for 70 percent of humanity by 2050. As recently as 1950, 70 percent of us were country folk.
CS economists Giles Keating and Stefano Natella crunch the numbers and reckon that, typically, a five percent rise in urban populations is associated with a 10 percent rise in per capita economic activity. Crunching them further, they find that there’s a “sweet spot” as the urban share of the population is moving from 30 percent to 50 percent and per capita GDP growth peaks. Emerging markets as a whole are currently about 45 percent, with non-Japan Asia and sun-Saharan Africa standing out. Developed economies are as high as 75 percent.
Adding other variables to this “sweet spot” — such as overall population size, relatively equal income distributions, falling levels of corruption and capital market access — and CS come up with a list of favoured countries for those following this theme and they include China, Egypt, India, Indonesia, Nigeria, Pakistan, the Philippines, Thailand and Vietnam. Not the BRICs in terms of clever anagrams, but an interesting collection of hotspots that, significantly, still has both China and India as prominent.
We find that, as countries urbanize, there is typiclaly an associated incremental gain in the consumption share of GDP, which we argue is particulary relevant in the case of China
Emerging markets facing current account pain
Emerging markets may yet pay dearly for the sins of their richer cousins. While recent financial crises have been rooted in the United States and euro zone, analysts at Credit Agricole are questioning whether a full-fledged emerging markets crisis could be on the horizon, the first since the series of crashes from Argentina to Turkey over a decade ago. The concern stems from the worsening balance of payments picture across the developing world and the need to plug big funding shortfalls.
The above chart from Credit Agricole shows that as recently as 2006, the 34 big emerging economies ran a cumulative current account surplus of 5.2 percent of GDP. By end-2011 that had dwindled to 1.7 percent of GDP. More worrying yet is the position of “deficit” economies. The current account gap here has widened to 4 percent of GDP, more than double 2006 levels and the biggest since the 1980s. The difficulties are unlikely to disappear this year, Credit Agricole says, predicting India, Turkey, Morocco, Tunisia, Vietnam, Poland and Romania to run current account deficits of over 4 percent this year.
Some fiscally profligate countries such as India may have mainly themselves to blame for their plight. But in general, emerging nations after the Lehman crisis were forced to embark on massive spending to buck up domestic consumption and offset the collapse of Western export markets. For this reason, many were unable to raise interest rates or did so too late. As the woes of the Turkish lira and Indian rupee showed last year, the yawning funding gap leaves many countries horribly exposed to the vagaries of global risk appetite.
There are some supportive factors however. The Fed’s signal this week that U.S. interest rates are unlikely to rise before 2014 shows that central banks in Europe and the United States will continue to gush money for now. So there should be enough cash available to plug the gaps in emerging nations’ balance sheets. Second, as growth eases, so will the deficits. For these reasons, Credit Agricole says the market will be forgiving of large current account deficits this year. But it warned:
What will happen once (developed market) rates are raised is another story, and emerging markets would better have fixed their main imbalances when the global monetary normalisation begins.
Not quite 99 emerging market beers on the wall
Should emerging market investors set aside their spreadsheets and crack open a cold one?
Their markets have zoomed higher from the March lows, with MSCI’s emerging markets stock index up 81 percent. Are they heading for a fall? Will investors soon be crying in their beer? And if so what kind?
Broker Auerbach Grayson held a rooftop fete this week showcasing emerging market versus developed market beers, with nary a Yankee brew in sight.
With the adventurous spirit and dedicated work ethic that can be found in all experienced emerging markets correspondents, I set in sampling the emerging brews first. No sip, swish and spit here, so the descriptions may get a bit more fuzzy as you read through the list.
It started with Argentina’s Barba Roja Aged Red Ale, the strongest of the evening at 9 percent alcohol. Not the one to slake your thirst on a hot August night, but it certainly can make your head spin faster than you can say “devaluation.” The smell is powerful, picking up deep scents of caramel. The taste is sweet as most extra-strong brews tend to be, but the finish is mild on the back of the palate. If only the Argentine government and its debt holdouts could settle up as gracefully.
Next up was another dark beer, this time from Brazil. The Xingu Black Beer from the Cervejaria Sul Brasileira is based on the traditional black beers made by indigenous populations in the Amazon. It is rich and sweet, with an overwhelming chocolate flavor that gets diluted by some bitterness from the hops after it sits on the tongue. It’s akin to drinking liquid bread, no butter necessary. Much like Brazil’s economy (and its president, left), this beer is complex, with a myriad of flavors hitting you all at once.
Can domestic demand boost African markets? Duet’s Salami talks to Reuters Television
Direct and indirect foreign investors fled from Africa as the credit crisis sparked a flight to safety, or at least familiarity, but Ayo Salami, manager of the Duet Victoire Africa Index fund believes domestic demand can step in to underpin growth.
Alazar,Investment returns are higher when asymetry of information is high. It is the shift in mentality that is intersting to see: the middle class in Africa is small, but growing, and shifting its consumption preferences. Exports, incl AGOA, and exporting bananas to the EU are being taped into for a while. Most of those sectors are not listed, so that Victoire can tap into the opportunity. Also, there are lots of distorting factors, like quotas. Please remember that if minerlas have provided lots of liquidity to a number of African countries, it is the banking, breweries, cement and telecoms that are driving the growth. If you are able to point out an exporting sector, appart from extractive industries, where the growth is strong, and set to last, and the companies are listed,then I will agree with your thesis.
