Urbanization sweet spots
It’s a hard slog sometimes looking for new and surprising sources of global economic growth that have not already be heavily discounted by global investors, especially in the uncertain world of 2012. It’s been as hard of late to find new arguments to invest in China and quite a few people suggesting the opposite.
But a Credit Suisse report out on Tuesday homed in on worldwide urbanization trends to find out where this well-tested driver of economic activity was likely to have most impact int he 21st century. For a start, the big aggregate numbers are as dramatic as you’d imagine. More than half of the world’s population now lives in urban areas, crossing that milestone for the first time in 2009. And, accordingly to United Nations projections, urban dwellers will account for 70 percent of humanity by 2050. As recently as 1950, 70 percent of us were country folk.
CS economists Giles Keating and Stefano Natella crunch the numbers and reckon that, typically, a five percent rise in urban populations is associated with a 10 percent rise in per capita economic activity. Crunching them further, they find that there’s a “sweet spot” as the urban share of the population is moving from 30 percent to 50 percent and per capita GDP growth peaks. Emerging markets as a whole are currently about 45 percent, with non-Japan Asia and sun-Saharan Africa standing out. Developed economies are as high as 75 percent.
Adding other variables to this “sweet spot” — such as overall population size, relatively equal income distributions, falling levels of corruption and capital market access — and CS come up with a list of favoured countries for those following this theme and they include China, Egypt, India, Indonesia, Nigeria, Pakistan, the Philippines, Thailand and Vietnam. Not the BRICs in terms of clever anagrams, but an interesting collection of hotspots that, significantly, still has both China and India as prominent.
We find that, as countries urbanize, there is typiclaly an associated incremental gain in the consumption share of GDP, which we argue is particulary relevant in the case of China
Melancholia, social class and GDP forecasts in Turkey
An interesting take on GDP stats and those who make the predictions. An analysis of economic growth forecasts for several emerging markets over 2006-2010 has led Renaissance Capital economist Mert Yildiz to conclude that analysts of Turkish origin (and he is one) tend to be:
a) far more pessimistic about their country’s economic growth outlook than the foreigners, and
b) more pessimistic than economists from Poland, Russia, India or China are about their respective countries.
In fact, in each of these countries, foreigners provided more optimistic GDP forecasts than the locals, Yildiz found. What is surprising about Turkey is the extent to which local analysts have tended to underestimate growth — the figure below shows an average deviation of minus 1.7. In Russia, locals’ deviation was second-largest at minus 0.5.
Yildiz comes up with several explanations, including a very attractive one about the inherently pessimistic nature of Turks as a people.
“Huzun” or gloom is an integral part of Turkish culture, he says of the feeling of melancholia that permeate the novels of Orhan Pamuk.
Turkish music, dominated by dirges lamenting lovers’ heartbreak, is “the best indicator of our collective huzun,” he says.
BRIC: Brilliant/Ridiculous Investment Concept
BRIC is Brazil, Russia, India, China — the acronym coined by Goldman Sachs banker Jim O’Neill 10 years back to describe the world’s biggest, fastest-growing and most important emerging markets. But according to Albert Edwards, Societe Generale‘s uber-bearish strategist, it also stands for Bloody Ridiculous Investment Concept. Some investors, licking their wounds due to BRIC markets’ underperformance in 2011 and 2010, might be inclined to agree — stocks in all four countries have performed worse this year than the broader emerging markets equity index, to say nothing of developed world equities.
For years, money has chased BRIC investments, tempted by the countries’ fast growth, huge populations and explosive consumer hunger for goods and services. But Edwards cites research showing little correlation between growth and investment returns. He points out that Chinese nominal GDP growth may have averaged 15.6 percent since 1993 but the compounded return on equity investments was minus 3.3 percent.
But economic growth — the BRIC holy grail – is also now slowing. Data showed this week that Brazil posted zero growth in the third quarter of 2011 compared to last year’s 7.5 percent. Indian growth is at the weakest in over two years. In Russia, rising discontent with the Kremlin — reflected in post-election protests — carries the risk of hitting the broader economy. And China, facing falling exports to a moribund Western world, is also bound to slow. Edwards goes a step further and flags a hard landing in China as the biggest potential investment shock of 2012. “Yet investors persist in the BRIC superior growth fantasy…If growth does matter to investors, they should be worried that things seem to be slowing sharply in the BRIC universe,” he writes.
Thomson Reuters data earlier this year appeared to show some disenchantment with the BRIC concept. After rising 1600-fold between 2003 and 2007, assets in BRIC funds had shrunk to $28 billion by August 2011, almost a quarter below 2007 peaks, a bigger fall in percentage terms than most other fund categories.
What of O’Neill, the man behind the moniker? He talks increasingly of Growth Markets, a broader grouping that also includes other promising emerging countries such as Turkey and Mexico. But at a Reuters investment summit this week O’Neill noted that the main reason for BRIC stocks’ underperformance has been a massive monetary policy tightening exercise in all four countries, prompted by rising inflation. With that at an end and valuations cheaper than they have been for a long time, he expects the BRIC markets, especiallly China, to do better next year despite slower growth. Time will tell.
