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An Investing Megatrend: How Emerging Wealth is Shaping the Future

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Globalisation is a rising tide that lifts all boats.

In an increasingly connected world, countries are engaging with global markets more than ever before. As a result, global wealth is shifting towards emerging markets. This megatrend—a global trend with sustained impacts—is profoundly influencing everyday life, society, and business.

Shifting Economic Power

Today’s infographic from iShares by BlackRock explains how emerging markets are classified, along with which countries are growing the fastest—and how investors can follow the money.

BlackRock-Emerging-Markets Global Wealth

What Is An Emerging Market?

Every economy goes through five distinct stages of growth:

  1. Traditional Society: Based on primary industries, such as subsistence farming.
  2. The Pre-Conditions of Take-off: Spread of technology creates a more productive agricultural economy.
  3. Take-off: Industrialisation begins, and technological breakthroughs occur.
  4. Drive to Maturity: More complex manufacturing, and large-scale infrastructure investment takes place.
  5. Age of Mass Consumption: Urban society and a tertiary industry dominate, as disposable income grows.
  6. Source

    Emerging markets fall into the transitory stages between ‘Take-off’ and ‘Drive to maturity’ as their economies modernise. Today, such countries offer lots of promise, but also come with a range of challenges:

    • Pro: Greater return potential, growing middle class, increasing consumption
    • Risk: Political instability, lack of infrastructure, lack of market access

    Between 2000–2018, emerging markets’ share of global wealth has more than doubled from 10% to 24%. China is a major player in this transformation.

    China’s Economic Might

    China’s impressive trajectory from agricultural economy to global superpower cannot be ignored. The nation is on track to overtake the U.S. in terms of gross domestic product (GDP, nominal) by the year 2030.

    Year🇨🇳 China GDP🇺🇸 U.S. GDP
    2000$2.2T$12.6T
    2010$6.1T$15T
    2018$10.8T$17.8T
    2020E$16T$20.2T
    2030E$26.5T$23.5T
    2040E$36.6T$28.3T
    2050E$50T$34.1T

    China’s enormous growth has a ripple effect on its GDP composition. A more affluent middle class is buying higher-priced discretionary goods—such as cars and electronics—boosting the country’s domestic consumption.

    Investors must keep an eye out for other emerging markets that are emulating China’s example.

    One Piece Of the Puzzle

    China is just one case study—several other economies are also making strides on the world stage. Each country brings unique advantages, but also barriers to overcome.

    CountryReal GDP Growth (2019E)StrengthsWeaknesses
    🇮🇳 India7.4%✔ Rapidly growing economy
    ✔ Vast working-age population
    ✘ Red tape
    ✘ Lack of infrastructure
    🇨🇳 China6.2%✔ Good infrastructure
    ✔ High R&D spending
    ✘ Ageing population
    ✘ High debt
    🇮🇩 Indonesia5.1%✔ Cheap labour
    ✔ Diversifying economy
    ✘Wide income gap
    ✘ Lack of infrastructure
    🇲🇽 Mexico2.5%✔ Integrated with global economy
    ✔ Cheap and qualified labour
    ✘ Political unrest
    ✘ Reliant on U.S. ties
    🇧🇷 Brazil2.4%✔ Diversifying economy
    ✔ Strategic location
    ✘ High production costs
    ✘ Inflation
    🇳🇬 Nigeria2.3%✔ High FDI
    ✔ Diversifying economy
    ✘ Political unrest
    ✘ Lack of infrastructure
    🇷🇺 Russia1.8%✔ Natural resources
    ✔ Educated workforce
    ✘ Political unrest
    ✘ Lack of FDI
    🇹🇷 Turkey0.4%✔ Cheap labour
    ✔ Strategic location
    ✘ Political unrest
    ✘ Red tape

    Source: Global Finance Magazine

    With these major emerging markets in mind, how can investors tap into the global wealth shift?

    Where Are the Opportunities?

    There are several avenues for an investor to play into this megatrend: structural solutions, consumer goods, and international investment.

    Structural solutions

    Emerging markets are increasingly gaining access to technology. Growth in connectivity is closely linked with improved productivity, and many countries are ripe for a surge in online users.

    However, much can still be done to speed up technological adoption, such as boosting 3G/4G network volume and coverage, and lowering the cost of data and smartphones to be more economical.

    By helping solve some of these structural constraints through technological innovation, investors can tap into the economic growth of emerging markets.

    Consumer goods

    As disposable income increases, a sizeable middle class will seek out products that elevate the quality of life. In India, domestic consumption is estimated to hit $6 trillion by 2023—four times its 2018 level.

    The region’s spending will likely be propelled by higher-priced goods, as well as a wider variety of choices across food, transport, and fitness categories.

    Global brands that plan to expand into emerging markets, or companies with a proven track record in these areas, are potential winners for investment.

    International investment

    Last but not least, investors can identify local winners in emerging wealth markets, through active or passive investing.

    An active investment strategy would be to directly buy into individual company stocks, listed on a country’s stock exchange. Meanwhile, a passive investing strategy would be to seek out exchange-traded funds (ETFs) covering specific markets, and/or sectors within emerging markets. Many of these are also listed on major exchanges.

    Diversifying either or both strategies across two or more countries can help mitigate risk. Investors can also choose index funds that broadly encompass all emerging markets.

    As countries climb the economic ladder, the emerging wealth shift continues to gain momentum. By staying attuned to these macro changes, investors may unlock long-term growth from emerging markets.

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China

How China Overtook the U.S. as the World’s Major Trading Partner

China has become the world’s major trading partner – and now, 128 of 190 countries trade more with China than they do with the United States.

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How China Overtook the U.S. As the World’s Trade Partner

In 2018, trade accounted for 59% of global GDP, up nearly 1.5 times since 1980.

Over this timeframe, international trade has transformed significantly—not just in terms of volume and composition, but also in terms of the countries that the rest of the world leans on for their most important trade relationships.

Now, a critical shift is occurring in the landscape, and it may surprise you to learn that China has already usurped the U.S. as the world’s most dominant trading partner.

Trading Places: A Global Shift

Today’s animation comes from the Lowy Institute, and it pulls data from the International Monetary Fund (IMF) database on bilateral trade flows, to determine whether the U.S. or China is a bigger trading partner for each country from 1980 to 2018.

The results are stark: before 2000, the U.S. was at the helm of global trade, as over 80% of countries traded with the U.S. more than they did with China. By 2018, that number had dropped sharply to just 30%, as China swiftly took top position in 128 of 190 countries.

The researchers pinpoint China’s 2001 entry into the World Trade Organization as a major turning point in China’s international trade relationships. The dramatic shift that followed is clearly demonstrated in the visualization above—between 2005 and 2010, a number of countries tipped towards Chinese influence, especially in Africa and Asia.

Over time, China’s dominance has grown dramatically. It’s no wonder then, that China and the U.S. have a contentious trade relationship themselves, as both nations battle it out for first place.

A Tale of Two Economies

The United States and China are competitors in many ways, but to be successful they must rely on each other for mutually beneficial trade. However, it’s also the major issue on which they are struggling to reach a common ground.

The U.S. has been vocal about negotiating more balanced trade agreements with China. In fact, a mid-2018 poll shows that 62% of Americans consider their trade relationship with China to be unfair.

Since 2018, both parties have faced a fraught relationship, imposing major tariffs on consumer and industrial goods—and retaliations are reaching greater and greater heights:

trade war china us

While a delicate truce has been reached at the moment, the trade war has caused a significant drag on global growth, and the World Bank estimates it will continue to have an effect into 2021.

At the same time, China’s sphere of influence continues to grow.

One Belt, One Road, One Trade Direction?

China seems to have a finger in every pie. The nation is financing a flurry of megaprojects across Asia and Africa—but one broader initiative stands above the rest.

China’s “One Belt, One Road” (OBOR) Initiative, planned for a 2049 completion, is advancing at a furious pace. In 2019 alone, Chinese companies signed contracts worth up to $128 billion to start Chinese large-scale infrastructure projects in various countries.

While building new highways and ports abroad is beneficial for Chinese financiers, OBOR is also about creating new markets and trade routes for Chinese goods in Asia. Recent research found that the OBOR program’s infrastructure expansion and logistics performance improvements led to positive effects on China’s exports.

Nevertheless, it’s clear the new infrastructure network is already transforming global trade, possibly cementing China’s position as the world’s major trading partner for years to come.

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Visualizing How the Demographics of China and India are Diverging

The world’s two most populous countries have some economic similarities, but China and India are also diverging in one key area: demographics.

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How the Demographics of China and India are Diverging

Within popular discourse, especially in the West, the profiles of China and India have become inextricably linked.

Aside from their massive populations and geographical proximity in Asia, the two nations also have deep cultural histories and traditions, growing amounts of influence on the world stage, and burgeoning middle classes.

China and India combine to be home to one-third of the world’s megacities, and they even had identical real GDP growth rates of 6.1% in 2019, based on early estimates by the IMF.

Diverging Demographics

But aside from the obvious differences in their political regimes, the two populous nations have also diverged in another way: demographics.

As seen in today’s animation, which comes from AnimateData and leverages data from the United Nations, the two countries are expected to have very different demographic compositions over time as their populations age.

The easiest way to see this is through a macro lens:

Populations of China and India (1950-2100)

 1950201920502100
🇮🇳 India 0.38 billion1.37 billion1.64 billion1.45 billion
🇨🇳 China0.55 billion1.43 billion1.40 billion1.06 billion

Although the countries have roughly the same populations today — by 2050, India will add roughly 270 million more citizens, and China’s total will actually decrease by 30 million people.

Let’s look at the demographic profiles of these countries to break things down further. We’ll do this by charting populations of age groups (0-14 years, 15-24 years, 25-64 years, and 65+ years).

China: Aftermath of the One-Child Policy

China’s one-child policy was implemented in 1979 — and although it became no longer effective starting in 2016, there’s no doubt that the long-term demographic impacts of this drastic measure will be felt for generations:

China Demographic Profile by Age and Population

The first thing you’ll notice in the above chart is that China’s main working age population cohort (25-64 years) has essentially already peaked in size.

Further, you’ll notice that the populations of children (0-14 years) and young adults (15-24 years) have both been on the decline for decades.

Typical population age structure diagrams

A reduction in births is something that happens naturally in a demographic transition. As an economy becomes more developed, it’s common for fertility rates to decrease — but in China’s case, it has happened prematurely through policy. As a result, the country’s age distribution doesn’t really fit a typical profile.

India: A Workforce Peaking in 2050

Meanwhile, projections have India reaching a peak workforce age population near the year 2050:

India Demographic Profile by Age and Population

By the year 2050, it’s estimated that India’s workforce age population will be comparable in size to that of China’s today — over 800 million people strong.

However, given that this is at least 30 years in the future, it raises all kinds of questions around the economic relevance of a “working age” population in a landscape potentially dominated by technologies such as artificial intelligence and automation.

Different Paths

While it’s clear that the world’s two most populous countries have some key similarities, they are both on very different demographic paths at the moment.

China’s population has plateaued, and will eventually decline over the remainder of the 21st century. There is plenty of room to grow economically, but the weight of an aging population will create additional social and economic pressures. By 2050, it’s estimated that over one-third of the country will be 60 years or older.

On the other hand, India is following a more traditional demographic path, as long as it is uninterrupted by drastic policy decisions. The country will likely top out at 1.6-1.7 billion people, before it begins to experience the typical demographic transition already experienced by more developed economies in North America, Europe, and Japan.

And by the time the Indian workforce age group hits 800+ million people, it will be interesting to see how things interplay with the world’s inevitable technological shift to automation and a changing role for labor.

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