The attractions of emerging markets are clear but, as returns disappoint, can the same appeal be found in the developed world? Richard Dunbar, investment director at SWIP, thinks so.
When investors talk about the attractions of emerging markets, they often cite the benefits of cheap labour, abundant natural resources, attractive demographics and strong economic growth.
But emerging markets have failed to translate these benefits into returns for investors recently. Since the start of the year, the MSCI Emerging Markets index is virtually flat, while the US S&P500 index has returned nearly 17% (on a total return basis). Perhaps the country best demonstrating these facets at the moment is not an emerging market at all, but the US.
Having gone through major outsourcing exercises during the past two decades, many US companies are now bringing their operations back home. It is interesting that Apple is resuming manufacturing in the US, with plans to invest $100m this year.
Why the US is showing all the signs of an emerging market
GE similarly plans to spend $800m re-establishing its plant at Louisville, Kentucky. While these are isolated examples, the fact that Asian real wages have almost doubled relative to the developed world since 2000 perhaps makes it less surprising that thoughtful businesses are tempering their Asian enthusiasm.
The US has always been rich in natural resources, but the shale gas revolution, and the abundance of cheap gas it is providing, is changing the US economy materially. A fall in the gas price of almost 70% over the past five years is giving quite an advantage to US manufacturers.
In fact, the National Association of Manufacturers has estimated that the shale boom could add one million manufacturing jobs in the US by 2025. The shale discoveries also raise the prospect of the US becoming a net exporter of energy in the years ahead.
US demographics also look attractive relative to most of their global economic competitors. Lately, a slowdown in births and illegal immigration – probably due to the economic downturn – had slowed population growth.
However, this follows decades of immigration and increasing fertility; the net result being that, by 2050, the median age in the US is likely to be 30-38 years, compared to 52 years in Europe, 45 years in China and 53 in Japan.
This article continues…
Putting the tech into protection
Square Mile’s series of informal interviews
Fallout from Haywood suspension
Launching later in 2019
£80bn funds under calculation