Private equity investment in emerging markets has reached a tipping point where the rapidly growing economies of the previous decade are slowing and giving way to a new group of rising countries, according to Ruchir Sharma, managing director and head of emerging markets at Morgan Stanley Investment Management.
While the last decade was marked by strong economic growth in Brazil, Russia, India and China — known collectively as the BRICs — the next 10 years will likely be characterised by slower growth in these markets and stronger economic indicators in other countries, Sharma said during a presentation at the International Finance Corporation's and the Emerging Markets Private Equity Association's conference in Washington DC Tuesday.
“In the subsequent decade you are set up for huge disappointments in their performance and that is what I suspect is going to happen with this theme of BRICs in the coming decade and something which has already begun,” Sharma said during his keynote address at the conference.
During the next three to five years, Brazil, Russia and South Africa are expected to grow less than the global economic average and possibly no greater than the US, while India and China may reach between 5 percent and 6 percent growth, Sharma said.
“This of course is still healthy in terms of the absolute growth rate but is a sharp comedown from the elevated rates of growth we saw over the last decade or so,” he said.
One of the problems plaguing the outlook for China is the country’s recent expansion in credit.
“When any country in the world has excessive credit growth, that is almost always a red flag, and in China what we’ve seen over the last five years is that credit growth has been far higher that GDP growth,” Sharma said.
Countries that could comprise the next wave of “breakout stars” include the Philippines, Indonesia, Thailand, Turkey, Poland, Peru and Chile, according to Sharma.
“A common factor … is that many of these countries were lagging during the past decade and there is new leadership that has come in and is changing things,” he said.
“Manufacturing as a share of GDP in Thailand is among the highest in the world. That is always a good sign … Turkey has been the bright star of the last few years and this is one big beneficiaries of commodity prices as well. If there’s one emerging market that has been the most reformist in the past few years it is Turkey.”
In Latin America, countries such as Peru, Chile and Colombia have enjoyed strong macroeconomic management, good macroeconomic policies and “increased integration”, according to Sharma.
“In emerging markets what we’re seeing is a leadership churn take place post the economic crisis of 2008,” he said. “The BRICs are fading and you’ve got these other emerging markets that are rising up.”
You can hear more about one of the the leading EMEA emerging markets when Private Equity International's Turkey Forum returns to Istanbul for a fifth year on 17-18 September, 2013.