Investors are concerned that China’s growth rate has slowed to 7.7%, but when was the last time the US, Japan, Germany or the UK saw that pace of GDP growth? One should also keep in mind that as these countries grow rapidly, the base gets bigger and it is therefore much harder to maintain the double-digit growth rates seen previously. China is now a US$6 trillion economy, second only to the US. The fact that an economy that size can grow at close to 8% is in itself an amazing feat.
Brazil
Brazil continues to show tremendous potential. It has a young and large consumer population and vast mineral and farming resources. With rising income levels, Brazil is likely to become an important market for consumer goods. President Rousseff’s government is very focused on eradicating poverty and expanding the middle class. Some of the changes have created short-term problems for a few companies, but we think they will make the necessary adjustments and eventually get it right. Inflation and low growth could be of concern in the short term. There is also a need to remove some of the bureaucracy and free up the economy. In our opinion, the complex tax code clearly needs revision, and acceleration in the granting of concessions by the government to improve infrastructure is also vital to support stronger growth for the country. The quality of investment in education is another area that could benefit from improvement.
Russia
The Russian economy is very dependent on the price of oil, and if oil prices stay high, Russia’s economy is likely to continue to hum. Like China, it is facing an aging population problem. However, the middle class should continue to swell as wealth from commodity exports filter down into the economy. Businesses supplying consumer goods and services to this burgeoning market appear to have the potential to benefit. Russia’s financial structures are underdeveloped and consumer debt levels are generally low. The Central Bank left its benchmark interest rate unchanged at 8.25% thus far this year in view of rising inflationary pressures. Russia suffers from an investor-confidence issue, demonstrated by the persistent outflow of capital from this market. If the government can instill good governance in corporate giants like Gazprom and Rosneft, we think the situation could change quickly.
India
In our view, bureaucracy is the biggest problem in India, the world’s second-most populous country, and Indians themselves often joke that the country grows in spite of government policy, not because of it. One should note that there is a huge disjoint between what the elected government wants to achieve and what the bureaucrats are willing to do to help the government achieve its goals. India’s Prime Minister and Finance Minister have been very active in encouraging more foreign investment into the country, but when investors try to bring capital into the country, they are often overwhelmed by red tape. There have been significant improvements in corporate governance, including the launch of an electronic voting system that could help raise the voice of minority shareholders. However, we think there is more to be done in terms of minority shareholder protection, especially from related-party transactions. India has a vibrant stock market with thousands of listed companies and a strong culture of entrepreneurship and investment.
China
Chinese equity markets have been volatile, as bouts of enthusiasm have often been followed by fears of government tightening measures. The property market has presented the Chinese government with a great challenge. It needs to maintain prices at affordable levels but must also ensure that its price control mechanisms do not cause a crash in property price. China’s economic data has generally remained positive. As we said more than a year ago when there were questions as to whether China was going to have a “soft or hard landing”, we did not think that China was going to “land” at all but that it would keep on growing at a robust pace. Exports have remained resilient while domestic consumption is picking up rapidly as wages rise and disposable income increases. The Chinese government has over US$3 trillion in reserves, and thus its ability to stimulate the economy when needed cannot be questioned.
