To gauge the various factors influencing international markets today and where the best investing opportunities are today, AdvisorOne spoke recently with several experts, including Don Gervais, global head of the fundamental equity product management for Goldman Sachs Asset Management.
What are the most important global-investing themes or issues today for you and your organization?
Gervais: One theme we are discussing with clients and see as an investing opportunity is emerging markets. When you look at how the world has been transformed over the last decade, a lot of these countries are in the process of evolving out of emerging-market status and are moving much closer to what has historically been called developed-market status.
We see a number of these countries as growth markets, and not surprisingly, this includes the BRICs – Brazil, Russia, India and China. With China now the second-largest economy in the world, it’s important – given the economic landscape – to look at how these countries are represented in client portfolios, so investors have exposure to the growth in these emerging markets.
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The BRICs have been talked about for a number of years, and we still very much believe that we are in the early days in terms of their impact on the global economy. When we look at opportunities in global investing, we are very excited about the BRICs. Looking at their evolution, when the concept was first coined by Jim O’Neill of Goldman Sachs, it met with a lot of suspect and skepticism.
Today, BRICs are now acknowledged to be a very important part of the global economy, which has prompted some to ask what other economies could also influence and have an equally sizeable impact on worldwide growth. Thus, we’ve looked at the economic landscape and are now discussing a term we’re very excited about – Next 11 or N-11. This is a group of nations that with their growth over the next 40 years can potentially rival the G-7 in economic importance.
The four most-advanced N-11 nations are South Korea, Mexico, Indonesia and Turkey, with the other seven in the group being the Philippines, Vietnam, Bangladesh, Nigeria, Egypt , Pakistan and Iran. (We do not directly invest in Iran as part of our strategy, but it is an important economy in terms of growth.)
What positive investment opportunities do you see based on the trends you described earlier?
Gervais: These N-11 markets are becoming very interesting. The International Monetary Fund says that there are approximately 150 non-developed economies worldwide, and we believe that there are 15 that really matter and that investors should focus on: The BRICs and the N-11. There are three key things that make them interesting as investment opportunities. One is the tremendous gross domestic product, or GDP, growth taking place in these markets, which has been quite strong and should be even more robust in the future. Our projections show that over the coming decade, the BRIC and N-11 countries could account for over 60% of global growth.
Second is population, namely that 20 percent of the world’s population reside in the N-11. That represents about 1.3 billion people, and the median age is in the mid-20s. In the BRICs, which accounts for over 40 percent of world population, the median age is 31, and the developed economies, of course, have a median age that is much higher particularly in Japan.
Third, we are seeing the tremendous development of the middle class, which totals about 300 million people in the N-11 countries. This means that there is a large number of people with increasing income levels that will be able to boost their spending.. Think about the demand for goods and services and the impact of that on commodities, such as food, petroleum and other materials. This helps the N-11 economies in terms of domestic growth and it helps outside economies, as well.
It is also important to note that N-11 offers diverse exposure – economically and geographically speaking. There are economies like South Korea that are much further along in development, and then you have countries like Bangladesh and Pakistan, which are what investors have historically thought of as frontier markets. Some of these are proven economies that are growing rapidly, while others do face challenges. But this represents some significant opportunities as they continue to get their monetary and fiscal policies right, to mature their rule of law and develop in other ways. These are all important issues.
This group has done reasonably well in their performance in dollar terms recently, especially South Korea, which has been especially robust, and is up just under 8 percent so far this year. Their diversification is a huge benefit to investors, since some of these markets – like Egypt – have seen a lot of geopolitical issues. With diversification, of course, you limit exposure to any one particular market.
As we talk with our clients, we speak about the emerging markets as one large group in the aggregate, which includes approximately 150 markets. Given these opportunities, we suggest they position themselves to take advantage of growth not across the group, but particularly in the BRICs and N-11 countries. This is where the growth should be concentrated.