For many countries, economic growth is proving to be somewhat elusive. Global growth continues to slow, with the latest International Monetary Fund (IMF) World Economic Outlook forecasting a deceleration from 3.6 per cent in 2018 to 3.2 per cent in 2019, and to settle at 3.5 per cent in 20201.
Figure 1: IMF growth projections, World Economic Outlook Update July 2019
With the lethargy currently permeating both developed and emerging markets, compounded by ongoing uncertainty in many areas – from geopolitics to global trade – investors are increasingly looking for new opportunities to achieve yield.
Bucking the trend: The 7 per cent Club
There are bright sparks on the horizon for those willing to take a long-term view. The IMF forecasts an uptick in growth from emerging markets over the next few years (figure 1). More specifically, we predict2 seven countries – mainly in South-east and South Asia – will achieve growth rates of 7 per cent or more in the 2020s. At this rate of growth, an economy can be expected to double in size every 10 years.
This select group of economies is bucking the slowed-growth trend caused by the twin drags of the United States-China trade war, and the burden of ageing populations. The seven countries expected to achieve 7 per cent growth in the 2020s are India, Bangladesh, Vietnam, the Philippines, Myanmar, Ethiopia and Côte d’Ivoire, which now make up ‘the 7 per cent Club’.
China would obviously have been a club member in the past. However, economic and structural challenges have driven its four-decade stretch of 7 per cent-plus growth to naturally moderate. In the years it experienced exponential expansion however, it was a revenue-generating market for corporations and investors globally. This bodes well for today’s 7 per cent Club, whose members can expect to be similarly attractive in the 2020s.
These seven countries in large part owe their membership to their governments’ economic reforms, that have been encouraging growth cycles. Investment in better infrastructure, for example, inspires foreign direct investment (FDI), which in turn fosters growth. Faster growth pulls large swathes of the population out of poverty, boosting their spending power. Then more spending power encourages further investment.
In India for example, structural reforms such as the introduction of a goods and services tax and a new bankruptcy law have helped boost its economy. Then in the Philippines, further infrastructure investment and development of its services and manufacturing sectors are expected to drive growth3. In Indonesia, economic growth should increase if President Joko Widodo uses his May 2019 election victory to pursue reforms; we expect this country of over 260 million people to be the world’s fourth-largest economy by 2030.
Opportunities and balancing the risk
While China’s economic growth has slowed, its growth story teases how Southeast and South Asia are likely to become more attractive investment corridors. These two regions already account for 28 per cent of global GDP, and their growth is creating more middle-class jobs and greater consumer spending power.
For fixed-income investors, more of these growing Asian economies are likely to be included in the critical benchmark indices, following China’s inclusion in the Global Aggregate index in April 20194. Such inclusion will encourage international asset managers to allocate their portfolios to these markets. Recent trends in real estate investment also show emerging markets such as Vietnam and India continuing to attract attention. This is because of a shift in risk-return preferences for real estate investments in 2019, driving investors to look towards alternative markets (given high levels of competition in gateway cities5).
As the focus of policy making increases in these developing economies, the level of risk should lower, making these new corridors more attractive to both investors and corporates. Looking at India and Indonesia for example, both have successfully taken steps to reduce seasonal spikes in food price inflation. Policymaking in many of these countries has also helped to manage inflation. Low rates of expected inflation and currency stability reduce the macroeconomic risks for fixed income and FDI alike.
So, what is the optimal strategy to mitigate risk and manage these opportunities? Thinking long term is the answer. Risk in these countries has many dimensions, whether geopolitical, regulatory or economic. It’s critical therefore to keep a watching brief on the drivers of growth – particularly the ability to channel savings into export-oriented manufacturing. This will encourage participation in global trade, help establish broad macroeconomic stability, and support implementation of structural reforms, such as economic deregulation.
The countries in the 7 per cent Club should offer opportunities for prescient investors, should their economic expansion and policy reforms continue. While there are no guarantees, and faster growth will not make these economies immune to periodic downturns, making a carefully considered commitment might well pay dividends in the not-too-distant future for those who capitalise on the opportunity.
Note: Figures not footnoted were drawn from Standard Chartered’s proprietary research
1 International Monetary Fund, World Economic Outlook Update, July 2019; “Still Sluggish Global Growth”; https://www.imf.org/en/Publications/WEO/Issues/2019/07/18/WEOupdateJuly2019
2 Where will growth be fastest in the next decade?, Standard Chartered, 1 July 2019; https://www.sc.com/en/trade-beyond-borders/where-will-growth-be-fastest-in-the-next-decade/; important disclosures regarding content from Standard Chartered Global Research can be found in the Global Research Terms and Conditions.
3 Strong Domestic Demand to Fuel Faster Philippine Growth in 2019 — ADB, 3 April 2019;
4 Indices and Benchmarks: The Chinese dam breaks, IPE, June 2019; https://www.ipe.com/reports/special-reports/indices-and-benchmarks/indices-and-benchmarks-the-chinese-dam-breaks/10031434.article
5 PWC Emerging Trends in Real Estate, Asia Pacific 2019; Published November 2018; https://www.pwc.com/sg/en/publications/assets/emerging-trends-real-estate-asia-pacific-2019.pdf
This article was also published by Euromoney.