Where should you sell and invest?

China should grow at above the new government target rate of 7% in both 2012 and 2013

Figure 3 – Chinese GDP growth rates have stabilised....

Global economy watch - Dec 2012 | Expolore the data

Chinese growth has recently stabilised at a rate slightly above the government’s new 7% target (see Figure 3) and this should continue into 2013. Businesses who have a presence in China should watch out for the following:

  • Stimulus package: The government announced a one trillion Yuan (c. £ 100 billion) infrastructure investment package in September targeted at building roads, airports, ports and railways. In an era of low or negative returns on many assets in the West, these projects could provide long term investment targets for cash-rich entities such as pension and sovereign wealth funds.
  • New Leadership:Maintaining growth in the short term will be a key challenge for the new leadership. In the medium term, Xi Jinping needs to deliver on the commitments laid out in the latest Five Year plan including reducing income inequality and improving the balance between consumption and investment.
We believe that the outlook for China remains positive. Recent business surveys suggest an expansion in both the manufacturing and service sectors and that consumer confidence is at a  16-month high. We project GDP growth rates of 7.4% for 2012 and 7.8% for 2013. Growth may slow a little in the longer term, but should still match the government’s 7% target over the rest of this decade.
 

India has embarked on a reform drive to boost flagging growth

Figure 4 – India’s disappointing performance in 2012 has forced policymakers to take action

Global economy watch - Dec 2012 | Expolore the data

India’s recent economic performance has been relatively disappointing with GDP growth decelerating to its slowest rate since the second quarter of 2009 and a particularly marked downturn in industrial production (see Figure 4).
This slowdown has provided the authorities with a strong incentive to introduce reforms. Businesses should have the following issues on their radar:

  • Insurance, pension and retail sector reform: Subject to parliamentary approval, the government opened up the pension, insurance and retail sectors to foreign investment through measures announced in October.
  • Growth could rebound: Opening up Indian markets to foreign investment should create job opportunities, increase consumption and boost growth in the economy, leading to wider business opportunities across different sectors for both domestic and international companies.

Our projection is for India to grow by 5.2% in 2012 and 5.9% in 2013, with the potential for even stronger growth in the later years of the decade.


 

Sporting events and government stimulus will drive Brazilian growth

Brazilian economic growth has slowed down over the past year but this should only be a temporary dip. The government’s policy response has been to announce a three-year long £49 billion infrastructure stimulus package which will help sustain growth going forward, while interest rates have also been cut significantly this year.

The 2016 Olympics and the 2014 football World Cup will boost the Brazilian economy in general but one particular consequence is that the authorities are acting on their commitment to increase the defence budget from 1.6% to 2% of GDP. The number of foreign and domestic defence companies with Brazilian presence has more than tripled since 2007 and is expected to increase even further.

Our projection is for Brazil to grow by 1.6% in 2012 but then pick up to around its longer term trend rate of 4% in 2013.


 

Where should you sell and invest?

Figure 5 – The emerging markets can be split into consumption markets or production markets

Global economy watch - Dec 2012 | Expolore the data

Emerging markets have some common characteristics but also important differences.  As these economies continue to change at a very rapid pace, we expect these differences to intensify in the future and change the economic structure of the countries concerned. This means businesses will need to adopt a customised approach when deciding to expand in these markets that is guided in part by whether their long term strategy involves selling their products in a foreign market or setting up production centres abroad to reduce their cost base.

We have focused our attention on India and China to indicate how two broadly similar emerging economies in terms of overall projected GDP growth can have different dynamics at a more detailed level. Figure 5 on the left suggests that China’s economic structure will change from a production-dominated to a more consumer-oriented one by 2020. In particular:

Consumption: A projected doubling of GDP per capita between 2010 and 2020 will translate to much greater consumer demand for non-essential products and services. So, setting up sales points in China will increase revenues for Western consumer-focused companies.

Production: A sharp decrease in the growth rate of the Chinese workforce by 2020 due to an ageing population will mean  that wages will be pushed up. Labour-intensive operations, like mass manufacturing hubs, will lose out from this trend.

China has different dynamics to India. Our analytical approach suggests that, by 2020, growth in India will come from both production – as its workforce will continue to grow rapidly, keeping wages down - and consumption. For example, the Indian Chamber of Commerce (FICCI) estimates that retail sales could double in value to around $1.3 trillion in 2020.

Businesses should not ignore the practical aspects of expanding their operations

Figure 6 – Despite their high growth rates, the main emerging markets still have work to do to make life easier for new businesses.

Global economy watch - Dec 2012 | Expolore the data

Businesses seeking to expand into the Chinese or Indian economies need to recognise that such a strategy will not necessarily be easy to implement.  Businesses will have to consider the practical aspects of expanding overseas as much as the macroeconomic environment. There are many obstacles and risks that need to be evaluated and overcome to make entry into fast growing emerging markets successful.

Figure 5 shows that India has the economic ingredients to nurture its consumption and production capacity. Instinctively this should attract foreign businesses.  But in practice this is not happening as fast as might be expected because local rules, regulations and conventions make it difficult to do business there relative to in advanced Western economies (see Figure 6).

The World Bank ranks India 132nd in the Ease of Doing Business index, lower than Ethiopia. Figure 6 shows the top three areas of weakness that the business community has highlighted. For example, it takes around twenty days for the authorities to process documents for anybody who wants to import raw materials.  In money terms, it costs more to import a product in India than the average for an OECD country, despite the lower standard of living there.


 

The emerging markets are too important to ignore

Global economy watch - Dec 2012 | Expolore the data Hazem Galal is the Global Leader for the Cities and Local Government Network at PwC. He is based in Abu Dhabi but is currently on secondment in Brazil.

What do you think is driving the growth in Brazil?

Brazil’s growth is significantly driven by commodities, especially in the mining, agribusiness and oil and gas sectors. Infrastructure improvements are also having a significant effect, with Brazil taking advantage of upcoming sporting events to bridge the infrastructure gap that exists with other similar economies. Brazil is currently spending approximately $80bn on infrastructure improvements, which equates to roughly 3% of 2011 GDP. Finally, the rise of a middle class with greater buying power continues to drive growth.

What is the economic outlook in Brazil and the other emerging market countries?

Growth is likely to continue and this is an exciting time to be involved with the emerging market countries. Businesses are becoming increasingly attracted to the large markets and the potential for growth that the emerging economies can deliver.

With regards to Brazil specifically, it is currently surfing on a wave of upcoming sporting events. There is effectively no unemployment here – practically everybody who wants a job can get one and foreign companies are leveraging local talent.

How are businesses feeling about emerging market countries?

Our clients are very optimistic regarding emerging markets. Several companies who have not had a presence in Brazil are now considering it as a country to move into. However, it is important to remember that while the emerging market economies are often bundled together, each country will present its own specific challenges and opportunities. For example, Russia has an ageing population and the poverty levels in South Africa are more evident than in some of the other emerging countries.

How are UK firms reacting to the rise of the emerging markets?

In Brazil, UK firms who specialise in areas such as security and construction have been taking advantage of the 2016 Olympics in Rio de Janeiro to promote their presence in the country. Other UK companies have been targeting the aerospace, defence and security sectors in an attempt to tap into the growth potential in Brazil.

What are the main issues firms are facing in these economies?

There will be different issues in each country but I’d say there are two main things to consider:

  1. It’s important that firms learn to play by the local rules and to understand the details concerning things like government procurement, which can be very different across economies.
  2. Local legislation can be a big issue for firms setting up in an emerging country. In Brazil, tax structures are complex and this presents obvious challenges. Also, our clients often look at where they can find a flexible workforce but local labour laws such as those in Brazil are not easy to deal with.

What are your top three tips for clients looking to invest in the emerging market countries?

  1. Firms will not recognise an immediate upside as soon as they enter the country– they need to nurture their market over a long period of time and to be strategic.
  2. It is important to have a physical presence in the country. Flying over from time to time isn’t enough to understand the market or to create relationships.
  3. Adopt a customised approach to investment depending on which sector and which emerging market you are targeting.