As 2010 rolls along, the stock market continues its rollercoaster ride. This year has seen a number of significant swings in the market, the most recent being to the upside. Stocks have been driven higher by a belief that the Federal Reserve will be able to spark inflation. There has also been continued growth overseas, driven by the emerging economies. In fact, many foreign stock exchanges are at or near all-time highs. After a crushing 2008, the emerging markets have returned to much higher growth levels compared to their developed counterparts.
Most developed countries are battling slower economic growth, high debt levels and rising raw materials costs. The result of the last 30 years of off-shoring manufacturing is catching up to most developed economies. Of course, the emerging markets have been the main beneficiaries of this trend. Most identify China as the main manufacturing giant. While China is the most populous country in the world, nearly all emerging countries have benefited significantly from their newer manufacturing sectors. Developed economies have dramatically benefited from cheap labor overseas, as products have been extremely inexpensive due to low labor costs. This is slowly changing, however, as wage pressure increases in China and other emerging countries.
We have never experienced a global economy like we have today. The United States, Western Europe and Japan are passing the economic baton to China, India and much of South America. There are roughly 6.8 billion people on the planet. Only one billion live in what we consider “developed economies.” That leaves 5.8 billion people who are benefiting from newer manufacturing jobs in the emerging economies. The logical conclusion from the increase of manufacturing jobs overseas is the continued increase in costs for raw materials, as demand for those materials increases. Since 2000, the Dow Jones/UBS commodity index has risen 100 percent. Much of this increase is due to precious metals and oil. This decade, we will most likely see agriculture goods increase significantly. There is simply not a large enough supply of basic foods such as soybeans, corn and wheat to feed the entire planet. Thus, it is exceedingly likely to see increases in the prices of these goods.
How the manufacturing trend affects the stock market is nearly impossible to quantify. What we do know is many U.S. companies have seen dramatic revenue growth in the emerging markets, thus greatly improving profits. Companies such as Caterpillar receive 67 percent of their revenue from overseas, while Google receives more than 53 percent. Even though our economy remains somewhat stagnant, a good deal of U.S. companies are growing dramatically overseas. This has proven to be a huge tailwind for the stock market. Most CEOs continue to comment on foreign growth being the primary driver for earnings growth. Going forward we are likely to see a continued focus on emerging markets as the primary driver of profit growth for U.S. companies.
Though there has been tremendous growth as of late, not all is rosy in the emerging markets. The slowdown in the developed world has had a dramatic effect on the emerging markets and, as of yet, the emerging markets have not been able to completely pick up the economic slack throughout the world. Inflation is also a huge concern as wage pressures are the primary driver of demand-driven inflation. Wages are rising extremely fast in parts of the emerging world, and this trend does not show any signs of abating. Another real threat to growth in the emerging markets is political instability. Historically, developed countries have thrived partly due to stable political backgrounds, while the emerging world saw many political shocks that unnerved investors. While it is impossible to say for certain that emerging countries are more or less politically stable, the gap between the political risks of developed and emerging countries is closing.
These are certainly interesting times we live in. The pace of globalization continues to accelerate, and the strength of the emerging economies has never been what they are today. Rather than resist the tide, we should look for opportunities to prosper in the shifting landscape. Our economic future depends on how well we are able to embrace the changing environment in which we find ourselves.
By Egan Ludwig
- Tread carefully when investing in developing countries (theglobeandmail.com)
- Emerging markets: $13 billion exodus (money.cnn.com)
- Emerging Markets: Proceed With Caution (money.usnews.com)
- Emerging Markets Attract More IPO Investors Than Developed World (dailyfinance.com)
- Investors are evacuating emerging markets funds (usatoday.com)
- Emerging markets may be overheating: Citi CEO (marketwatch.com)