Brazilian GDP per capita has halved in U.S. dollar terms over the last decade, and we suspect that this “lost decade” might be clawed back sooner than anyone expects. The demographic sweet spot should certainly be helpful for Brazil—the ratio of adults per dependent moved above two in 2010 and will remain there until at least 2040 and at 80% of GDP versus 40% in the early 2000s, deposits are now big enough to finance growth. If we add in the potential for an improved commodity cycle to stoke the virtuous cycle of a stronger currency, lower inflation and lower real rates, and consider the possibility that human capital is now ready for an ICT revolution—the impact on growth could be profound.
It’s Not Just China
The potential economic resurgence of countries such as Brazil is important, but it’s symptomatic of a far more exciting trend: the emergence of new and innovative companies in parts of the world that have historically not been known for their corporate dynamism. This is the big story that no one is paying nearly enough attention to, yet it’s the one that matters most for the longer-term health of the asset class.
China is no longer the only game in town. Indeed, one of the most encouraging developments over the last year or two is the variety of interesting and differentiated businesses from India, Brazil, Indonesia and beyond.
There are some commonalities: the arrival of 5G and the cloud appear to finally be democratizing entrepreneurialism in many of these countries, as has already been the case in developed markets and China. It is unlikely to be a coincidence that one of the most remarkable transformations appears to be underway in India, a country that in the space of five years went from having one of the worst mobile internet infrastructures in the world to one of the best, and now also boasts the largest and fastest-growing open digital payments infrastructure in the world: last year India produced more unicorns—privately-held start-up firms valued at more than $1bn—than anywhere else in the world apart from the U.S. and China (and based on the numbers so far this year, the country has leapfrogged China into second place).
Conclusions
The lesson of history is that individual dislocations associated with war and pandemics can take years to normalize; we have now had both in rapid succession. As markets continue to oscillate wildly in response to every shift in the yield curve and inflation expectations, volatility will remain the only constant. However, we retain our optimism that the 2020s will be a much better decade for emerging market investors than the 2010s.
Will Sutcliffe is head of the emerging markets team at Baillie Gifford.