Emerging markets: To have or have not
Breakout Nations: In Pursuit of the Next Economic Miracles. By Ruchir Sharma
“EMERGING markets” is a useful term precisely because it is imprecise. Coined for the convenience of investors looking for somewhere exciting to put their money, it covers a bewildering range of economies with little in common, except that they are not too rich, not too poor and not too closed to foreign capital.
The invention of “emerging markets” as an asset class required the invention of experts to manage those assets; experts who could discourse confidently about places as far apart as South Korea and South Africa. It might seem impossible to say anything coherent about such an eclectic mix of places. But in fact emerging markets have shadowed each other surprisingly closely in recent years, as Ruchir Sharma of Morgan Stanley points out in his new book, “Breakout Nations”.
Mr Sharma argues that emerging-market funds have lost sight of local idiosyncrasies in their fixation with global macroeconomic forces. Because of this “macro mania”, funds make “little or no distinction between Poland and Peru, India and Indonesia”, which he suggests further synchronises these markets. Emerging markets may have little in common except the funds created to invest in them, but that in itself creates a powerful affinity between them. The term “emerging markets” has helped to create the world it named.
Mr Sharma offers a diverting guide to that world. Based in New York, he spends about a week each month in one emerging market or another, briefing Vladimir Putin in Russia, partying on the shores of Turkey’s Bosporus, or hopping from one S?o Paulo helipad to another. In addition to growth rates and stockmarket returns, he monitors billionaire lists, the size of second cities and the prices of hotel rooms. He worries when a country’s billionaires become too rich (India has far fewer billionaires than China, but more of them are worth over $10 billion); its second cities are too small (Bangkok’s dominance suggests an overconcentration of opportunity in Thailand); and its hotel rooms are too expensive. The price of a room in Moscow’s Ritz-Carlton ($924) and S?o Paulo’s Fasano hotel ($720) are telltale signs that the commodity wealth in Russia and Brazil is bidding up prices across the board, eroding the competitiveness of other industries.
As it jumps from one country to the next, the book throws up some intriguing juxtapositions. Dissatisfied with the obvious parallels between India and China, Mr Sharma sees a cultural kinship between India and Brazil, countries united in their “late dining habits”, “colourful personalities” and “casual informality”. He hopes that the Philippines will escape Mexico’s fate as a “tycoon economy” dominated by fat cats in sheltered domestic markets. He likens Kemal Ataturk’s imposition of secularism on Turkey’s Muslim population to the imposition of communism on eastern Europe. Under the moderately Islamic leadership of Recep Tayyip Erdogan, he argues, Turkey is now free to be itself. Its pop culture is rolling across the Middle East like the “Korean wave” sweeping Asia.
Mr Sharma tries to draw some general principles—“rules of the road”—from this clutch of insights, but even he does not take them too seriously (one of his rules is “Don’t get hung up on rules”). Unfortunately, his insights are also sprinkled with mistakes. He implies that South Korea’s hard landing after the Asian financial crisis in 1997-98 was a blessing in disguise—a salutary shake-up that propelled it into the OECD club of rich nations. But South Korea was already a member before that calamity. He thinks American policymakers followed Friedrich Hayek’s advice in the early years of the Depression, even though Hayek was virtually unknown in the English-speaking world until 1931. He also credits Hayekian ideas for America’s economic might in 1950, thereby ignoring the impact of both the New Deal and the second world war.
Mr Sharma falls for the hoary fallacy that economies compete with each other in the same way that companies do. “The growth game is all about beating expectations, and your peers,” he writes. But one country’s success does not put its peers out of business; on the contrary, it creates a bigger potential market for their goods. His view may be warped by his role as a fund manager, watching countries compete with each other for his funds. As an investor, he must also look for countries that might beat expectations. If a country’s success is widely recognised, the good news will already be priced into its assets. In the period since Brazil’s economy featured on the cover of this newspaper in 2009, Mr Sharma points out, its stockmarket has fallen in dollar terms.
Mr Sharma does not believe the shared success of emerging economies can continue. Some countries will break out from the pack, others will disappoint. The very concept of emerging markets may lose its appeal, he writes, as investors discover they need to distinguish between them: “These economies are now too big to be lumped into one marginal class, and are better understood as individual nations.” But if emerging markets stop making sense as an investment category, what will happen to the globe-trotting emerging-markets expert? “Breakout Nations” is something of a paradox: a broad, breezy book in praise of narrowness and depth.