Not long from now, the entire notion of “emerging markets” will go the way of telephone land lines and gasoline-powered cars. Soon, so-called “emerging” markets will be bigger than those that have (supposedly) been granted “developed” status.
I’ve written before about how it’s strange to speak of the world’s second-largest stock market as “emerging”. Today, China’s stock markets are worth more than those of France, Germany and Switzerland – combined.
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This shift – as the Mexicos, Indias and Bangladeshes of the world (to say nothing of China) steadily close the gap with the U.S., Japan and EU – will be a defining characteristic of the global economy in coming decades. And this shift will create big investment opportunities…
How the balance of power is shifting
In 1995, the “Emerging 7” countries – China, India, Brazil, Russia, Indonesia, Mexico and Turkey – totalled just half the size of “the Group of 7” developed countries – the U.S., Japan, Germany, United Kingdom, France, Italy and Canada – based on GDP at purchasing power parity (PPP), which adjusts for differences in the cost of living between countries.
But this is changing, as the figure below shows.
In 2016, the economies of the E7 countries were, combined, larger than the economies of the G7 countries.
And by 2040, PwC expects that the E7’s economies could be double the size of those of the G7.
That means that by 2050, E7 countries will make up almost 50 percent of the global GDP (based on PPP), while G7 countries will only make up around 20 percent. For comparison, G7 countries currently make up 31 percent of global GDP… while E7 countries make up 37 percent.
China and India will make up most of the world’s GDP – with China’s share growing from almost 18 percent today to 21 percent by 2050. Meanwhile, India’s share will grow from 7 percent today to 15 percent by 2050.
During this time, the U.S. (which in 1990 accounted for 21 percent of global GDP) will fall from today’s 16 percent to below 12 percent in 2050. And the European Union will fall from 15 percent to 9 percent over the same period.
In this shift, Brazil and Mexico are expected to overtake Japan and Germany to become the fifth- and seventh-largest economies. Meanwhile, India will overtake the U.S. to become the second-largest economy.
The chart below shows how a list of the world’s top 10 economies will change by 2050…
What’s driving this economic shift?
To put it simply, this shift is taking place because E7 economies are growing faster than G7 economies. A lot faster.
PwC expects E7 country GDPs to grow at an average annual rate of 3.5 percent between 2016 and 2050 (but as I showed you recently, some emerging markets will grow much faster than that).
Meanwhile, G7 GDPs are only expected to grow at an average annual rate of just 1.6 percent from 2016 to 2050.
So where is all this growth – in emerging economies in particular – coming from?
Economic growth comes from two sources: Population growth and productivity growth. (Broadly speaking, economic growth is a function of the number of workers in an economy, and their productivity.)
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Shifting demographics, in part, drives economic growth… it’s responsible for a growing workforce. And while population growth is falling in many major economies in Europe, and is negative in places like China and Japan (reducing the labour pool and damaging productivity over the long term) it is expected to rise in many other parts of the world.
For example, Africa will see the highest population growth. But countries in Southeast Asia also have good reason to be optimistic… and changing demographics in this region will likely boost economic growth over the next several decades, as we’ve written before.
For economies, productivity is often measured as the percent increase in GDP per capita – that is, the total economic output per person. This can come from people working more efficiently, like through technological innovation. Higher productivity means a growing economy.
As you can see in the chart below, annual GDP per capita growth is expected to be more than 3 percent in many emerging markets from 2016 to 2050. Meanwhile, countries like the U.S., U.K. and Japan will experience annual economic growth of 1.5 percent or less.
How to profit from the shift
To profit, first you need to invest, and an easy way to do that is by buying a broad emerging markets ETF like the iShares MSCI Emerging Markets ETF (NYSE; ticker: EEM). EEM tracks an index of emerging-market firms weighted by their market cap.
But if you want to make outsized returns, one of the best ways is by investing in China. As I said earlier, China’s share of the world’s GDP is growing every year. And right now, the country is experiencing a massive middle-class boom… by 2020, there will be over 550 million middle-class people. That means a lot of money is about to flow into Chinese companies.
We’ve uncovered three ways to profit from the Chinese middle-class boom. And it couldn’t be easier to invest in them. Each of these investments trade on major exchanges. That means you’ll likely be able to buy them from the brokerage account you already have.
You can learn more about the massive opportunities being created by the Chinese middle class right here. (If you’re a Churchouse Letter subscriber, you should have already seen this report… if not, please visit the subscription portal here to check it out.)
Good investing,
