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Next 10 years about emerging markets, again
(pictured: Chris Trevillyan)
Australia’s potential GDP growth is better than most of its developed market peers over the next 10 years, according to the latest capital markets analysis by Frontier Advisors. But emerging markets are likely to perform better.
The assessment was presented last week by consultants Chris Trevillyan, Alvin Tan and Anthony Michael, and included a special analysis of China following a recent field trip.
Trevillyan said that demographic headwinds would impair growth for many developed countries, especially Germany and Japan, which have low-to-no population growth.
In its assessment, GDP growth between 2015 and 2025 for the developed world would average at: I.5 per cent for the US; 1.8 per cent UK; 0.9 per cent japan; 1.0 per cent Germany; and 2.4 per cent Australia. For the developing world the numbers are: 3.9 per cent Brazil; 3.0 per cent China; 4.7 per cent India; 4.4 per cent Indonesia; 5.9 per cent Nigeria; and 2.0 per cent South Korea.
Population growth is a strong contributor. For instance South Korea has one of the lowest population growth rates in the world while Nigeria has one of the highest. Nigeria is expected to become the world’s third-largest country by population by 2050.
Global growth would be about 1 per cent lower over the next 20 years, Trevillyan said, but emerging markets were different, with the net result being zero change over the medium term.
Alvin Tan said that some of Frontier’s managers were expecting equity market returns to average about 5 per cent, although the asset consulting firm was “a bit more optimistic” than that. The firm believes that having FX exposures could provide valuable protection, given the “limited upside” potential of the Aussie dollar.
The consultant questions the uniformity one of the consensus views of the moment, which is continued downward pressure on inflation. “Some of the bigger investment trends, such as healthcare and education, could put pressure back on inflation,” Trevillyan said.
Anthony Michael said that the stronger growth rates of emerging markets over developed markets had been going on for some time and countries such as Australia and New Zealand were already positioning themselves for it. Tourism and educational services were industries which would benefit from emerging market growth.
“It’s already happening,” he said. “What we’re looking at is how is it going to continue?”
On China, Frontier believes that the slowdown in growth is a part of a natural transition – from industrial to services-led economy and from being capital investment driven to being driven by income and consumption growth.
“The transition will not be easy and will be particularly complicated given the size of the Chinese economy, but it is not impossible. Potential future growth can still be strong,” they say in a report.
Tan said that emerging market growth had recently been the slowest since the GFC and even for it to be “less bad” would benefit global growth. “We think it will pick up this year and next,” he said “and then hopefully the world will recover and we’ll get the next leg-up.”
The overall asset allocation implications for Australian investors were to support an overweight position to growth assets, including emerging markets and Australian equities.
