Rethinking emerging markets

“Ten years ago, the G-7 economies accounted for two-thirds of the global economy, [but] now account for less than half,” he said. “Within the next five or six years, the U.S. will no longer be the largest economy in the world. These are profound structural changes.”

Emerging countries have always had large populations, but lacked economic size. Due to astounding growth rates over the last decade, they have now built enough economic muscle to match their population advantage.

“Growth rates in the emerging world are multiples of what we are going to see in the developed world this year, next year and for the foreseeable future,” said Jestin. “This means the emerging world will account for all of the net new demand for commodities we’re going to see over the next decade. If you’re negative on the emerging world, you’re negative on commodities.”

Another sector that benefits from emerging markets’ exponential growth is manufacturing. “China sells more cars and trucks than Canada, U.S., Mexico combined,” said Jestin. “The fastest growing car markets in the world today are China, Russia, India, Brazil, Chile and Peru.”

That’s important news for Canada, which sends 90% of its exports to the U.S., a stagnant market. “Getting in the game in manufacturing will involve changing our view of where the markets are going to be,” said Jestin.

“We [must] exploit the new opportunities and develop strategies that are poised towards [emerging markets]—as opposed to focusing on the good old days when we could rely on the U.S. market,” he continued. “If we stay focused on the U.S. market and [old] strategies, Canada is going to miss out in terms of growth and opportunity.”

Another panellist, Pablo F. G. Bréard, vice-president and head of international research with Scotiabank, called attention to the growing appeal of Brazil and other Latin American economies, often overshadowed by their Asian counterparts.

Making a strong case for Brazil, he called it “the powerhouse of the Americas.” The country has $240 billion worth of U.S. treasuries, four times what Canada has.

Brazil isn’t dependent on China, since it has a large local market, he added. “In Latin America, Brazil has become a key axis for stability and growth potential for investments.”

Jonathan Haussman, vice-president of alternative investments and fixed income emerging markets with the Ontario Teachers’ Pension Plan, expressed similar sentiments.

He said Latin America is the most interesting of all emerging markets. “Brazil is a very large, diverse and sophisticated country and we have to depart from the notion that folks who’ve made a lot of money in [Brazil] made it by tanning hide,” said Haussman. “They’ve done it by building airplanes.”

Yet, the majority of institutional investors haven’t embraced emerging markets. “Just to get a 5% allocation to stocks and bonds in emerging markets among the institutional investors would [equal] close to $1 trillion investment,” he said.

Meanwhile, at the Canadian Pension & Benefits Institute conference in Montreal yesterday, the talk was also focused on emerging markets.

Speaker Don Drummond, chair of the Commission on the Reform of Ontario’s Public Services and former chief economist at Toronto-Dominion Bank, told the audience that pension funds should invest more heavily in emerging markets, reports the Globe and Mail.

He said that Canada’s economy is too dependent on the U.S., and that turning to emerging markets is one way of distancing ourselves from the financial troubles in Europe and the U.S.

“We better get used to two-thirds of the world’s growth coming from those economies,” he said. “We don’t, unfortunately, have a large weighting in the emerging countries.”