Serious investors will know that Brazil, Russia, India and China (the BRICs) are doing a lot better than the traditional developed economies. They probably have some money in a BRIC or Far Eastern fund. They might even have dipped into what the investment industry calls frontier markets – small stockmarkets such as Pakistan, Tunisia, or Vietnam. But over the next 20 years, the emerging markets are going to stop emerging. They are going to turn into the establishment.
Last week, Goldman Sachs published a set of long-range forecasts for global stockmarket capitalisations. It predicted that by 2030 the value of emerging-market stocks would rise more than fivefold to $80trn. The emerging nations’ share of world equity capitalisation would, the bank forecast, rise to 55% from 31% today.
China will be the world’s largest market. Its total value, Goldman predicts, will increase to $41trn by 2030, from just $5trn today. It projects that the American market will be worth $34trn by then, making China easily the world’s biggest market. Right now, the US stockmarket still accounts for almost 30% of global market capitalisation. China makes up just 7.2%, only a little ahead of Britain,
at 6.6%. Brazil accounts for only 2.8% of the world markets, just slightly more than Switzerland (although there are 205 million people in Brazil, compared to 7.6 million in Switzerland).
There is nothing very controversial about all this. The emerging-market economies are growing at a far healthier rate than either America or Europe. The International Monetary Fund predicts the emerging economies will grow at 6.4% next year, compared with 2.4% for the developed world. They keep on growing at double or triple our rate every year. Nor is there any reason to expect that to slow down. The demographics of the developing world are in good shape, as are government finances. And they still have a lot of catching up to do to match living standards in the West. It’s hardly a surprise that their stockmarkets will overtake ours. A hundred years ago, New York surpassed London in importance. Soon, Shanghai will overtake New York. The interesting question is how that will impact on the way the markets work.
We’re used to a world where the dominant investment themes and ideas are largely set in New York and, partly, London. The Dow Jones index might just be 30 firms. Its composition might well mean that it isn’t even a very accurate reflection of the American economy, never mind what is happening in the rest of the world. But as a general rule, if you know what’s happening to the Dow, you’d have a pretty good idea where the rest of the world’s markets are heading.
Likewise, the FTSE is an oddball mix of firms, largely dominated by oil and mining, plus big bank and drugs companies. It doesn’t tell you much about the British economy. But if mining stocks are all the rage in London, you can be certain they’ll soon be just as popular in the rest of the world. Ideas in vogue in New York and London dominate the global markets everywhere. If dividends are in fashion in the US markets, they will be growing in importance globally. If stock buy-backs are a more popular way of rewarding investors in London, that will be replicated too.
Expect all that to change in the next 20 years. What will count is the mood and ideas in Shanghai, Moscow, or Sao Paulo. The one number you really want to know won’t be the Dow: it will be the change in the Shanghai Composite. It will be the way those markets are developing, the way that money is flowing through them, and the demands investors are making, which will set the mood for global markets.
That may well turn out to be scary for investors. It’s an old-fashioned view to portray the Shanghai index as a quasi-gangster market, with some mysterious Mr Chan sitting in a dark basement dictating whether it rises of falls. But it certainly does operate under different rules to the stockmarkets of the West.
For starters, it is heavily manipulated by the government. It also has no clear and transparent rules governing which firms can be listed, and what they need to disclose to investors. It’s not fully open to foreign investors. And the Chinese, who make up the bulk of investors, are inveterate gamblers, who have always thought stockmarkets should be casinos rather than places where you try and seriously analyse a company’s likely future earnings. The critics who point out that the New York and London market promote a casino culture haven’t seen anything yet.
Right now, the stockmarket is volatile, short-termist and self-interested. But as it comes to be dominated by Shanghai and San Paulo it is going to get a lot more so. They aren’t likely to be very interested in small investors, because they don’t count for much in those markets. Nor are standards of honesty likely to be the same. There is no point complaining about that, however. The rules of investment are about to change. And if you don’t understand the new rules, then you haven’t much chance of winning the game.