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Investors Should Look Beyond BRIC Countries, Says PwC

by Jason Gorringe,, London

07 March 2008

A report published by PricewaterhouseCoopers on Tuesday has suggested that investors need to look beyond the BRICs (Brazil, Russia, India and China) for future growth opportunities.

‘The World in 2050: Beyond the BRICs’ concluded that long-term prospects for China, India and other so-called ‘E7’ economies (Brazil, Mexico, Russia, Indonesia and Turkey) are still upbeat, but looks for the first time at an additional 13 emerging economies, which the firms argues also have the potential to grow significantly faster than the established Organisation for Economic Co-operation and Development (OECD) countries.

John Hawksworth, head of macroeconomics at PricewaterhouseCoopers LLP, observed that:

“The global centre of economic gravity is already shifting to China, India and other large emerging economies and our analysis suggests that this process has a lot further to run."

“Our latest projections suggest that China could overtake the US in around 2025 to become the world’s largest economy and will continue to grow to around 130% of the size of the US by 2050. India could grow to almost 90% of the size of the US by 2050. Brazil seems likely to overtake Japan by 2050 to move into fourth place, while Russia, Mexico and Indonesia all have the potential to have economies larger than those of Germany or the UK by the middle of this century."

“But the fastest mover could be Vietnam, with a potential growth rate of almost 10% per annum in real dollar terms that could push it up to around 70% of the size of the UK economy by 2050.”

The report also highlights that there are many other alternatives worth considering, depending on the nature of the investment and the risk tolerance of the investor.

For example, it suggests that Nigeria, while high-risk, has the long-term potential to overtake South Africa to be the largest African economy by 2050. The Philippines, Egypt and Bangladesh also have high growth potential but also high risk levels.

However, with the possible exception of Vietnam relative to Turkey, the additional analysis does not change the conclusion from earlier PricewaterhouseCoopers research that the E7 will remain the largest emerging economies through to 2050.

Mr Hawksworth explained that:

“The rapid growth of the emerging economies does not mean the demise of the established OECD economies. In fact it should prove to be a boost for them through growing income from exports and overseas investments, even as the OECD share of world GDP declines."

“But while the macroeconomic story should be ‘win-win’, at the company level there are likely to be both winners and losers from the process of adjusting to this new world economic order.”

The PwC report went on to suggest that e-tailers should be potential winners, benefiting from lower cost imports into their OECD markets while also having the potential to set up new stores in the E7 countries. China, in particular, is likely to be the second largest consumer market in the world by 2020, while cities across the leading emerging markets from Shanghai to Mexico City will have rapidly growing middle class populations with the spending power to afford Western consumer goods and services.

The PwC macroeconomics chief commented:

“But of course, retailers need to be savvy enough to identify the right business strategies and local partners for such overseas ventures. This has not always been the case for overseas investments by retailers in the past, particularly in culturally unfamiliar territories such as China or India.”

Similar cautions apply to other potential winners, such as business services, energy and utilities, healthcare, educational services, media companies and owners of leading global brands. All of these are, in principle, well placed to benefit from the rapid growth in emerging markets provided they can identify and execute the appropriate business strategies, bearing in mind that strong domestic competitors either already exist or will probably soon emerge in these markets.

The accounting firm went on to warn that mass market manufacturers are likely to lose out, due to increased Chinese competition. New lower cost competitors like Vietnam will also increasingly challenge China as the leader of low-cost manufacturing in the global economy, while China itself moves into higher technology areas just as Japan and South Korea did in earlier decades.

Other potential losers will include companies (including manufacturers) that are heavy users of energy and other commodities as inputs, given the likely upward pressure on the relative prices of these commodities from rapid growth in China and other emerging economies.

As highlighted in previous PricewaterhouseCoopers research in their ‘World in 2050’ series, mitigating upward pressure on energy consumption and carbon emissions is one of the most important challenges posed by rapid growth of the emerging economies.

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