What are the Emerging Markets? An emerging market is a country that has some characteristics of a developed market, but does not meet all the standards to be a developed market. Originally brought into fashion in the 1980s by then World Bank economist Antoine Van Agtmael the term is sometimes loosely used as a replacement for emerging economies, but really signifies a business phenomenon that is not fully described by or constrained to geography or economic strength; such countries are considered to be in a transitional phase between developing and developed status.

I like to think of EMs as countries that are growing very quickly, for good reasons, and that have a good chance of graduating into developed status in the future.

Countries that are growing faster than most developing countries but are not yet newly industrialized.

“Starting in the year 2003, an underappreciated turning point in the course of the world, this good fortune suddenly spread to virtually all emerging nations, a class that can be defined a number of different ways but here broadly means countries with a per capita income of less than $ 25,000.” --- Ruchir Sharma, Breakout Nations

Emerging Market equities declined greatly (-36%) but have recently rebounded (+28%)

Individual chapters on China, India, Brazil, Russia, Mexico, Turkey, and South Africa,...as well as Central Europe, Southeast Asia, and elsewhere

Mr. Sharma has two important and general points to make. First, the period of 2003-2007, in which there was incredible growth throughout the emerging world, is gone. It was an unusual period not likely to be repeated. Second, we must no longer think of these economies as homogeneous groupings, as perhaps we did before. In order to predict which economies will do well in the future, we must look at each country on a case by case basis. Some of these countries will prove to be solid and will break out from the slower growing pack. Those are the breakout nations, but there is no single formula for the breakout. Instead there is only a long list of ingredients that will make the breakout likely

http://emergingmarketsblog. wordpress http://emergingmarketsblog.wordpress.com/2012/05/20/searching-for-breakout-nations-in-a-sea-of-emerging-markets/ Nice Summary (Unscientific) of Sharma’s book by David Gates – an analyst

Brazil China Czech Hungary

India Malaysia Indonesia Mexico

Nigeria Philippines Poland Romania

Russia South Korea South Africa Sri Lanka

Taiwan Turkey Thailand Mexico

-- Capital inflows to EMs grew 92% (2000-2005) and 478% (2005 – 2010) Some Salient Facts Drawn from Sharma’s Book -- Capital inflows to EMs grew 92% (2000-2005) and 478% (2005 – 2010) -- Strong & widespread EM growth began in 2003 -- 2007 185 countries had positive growth, 114 grew faster than 5% -- Russia went from $1500 to $13,000 per capita income (2003 – 2012) -- 1980 only 16 countries held inflation below 5%, by 2006 103 countries did it. -- 1970s $1 debt produced $1 GDP, 1980s & 1990s $3 debt produced $1 GDP, 2000 – 2010 $5 debt needed to produce $1 GDP -- Out of 180 countries only 1/3 can grow at 5% for one decade only 1/4 can grow at 5% for two decades only 1/10 can grow at 5% for three decades only 6 countries grew at 5% for four decades only 2 countries grew at 5% for five decades (Taiwan and S Korea) -- New Normal for Growth US 2-2.5%, Eurozone & Japan 1-1.5%, EMs 3-4%, China 6-7% -- EMs very different: You must consider their macro variables, and then “kick the tires”

Sharma states that there is no “magic formula” for growth Sharma states that there is no “magic formula” for growth...many factors come together to produce the outcome... --- free markets in money and people --- large amounts of saving that are productively employed --- a banking system that makes good investments --- strong property rights and a firm respect for the rule of law --- low and stable fiscal and trade deficits (or surpluses) --- a low and stable rate of inflation --- open environment for investment by foreigners --- better roads, feed the children, provide a good education This is very much like a “positive business environment” that I feel should be pursued by policymakers.

You can buy Sharma’s book as a Kindle version or you can listen to it as an audiobook.

Thank You for Listening Let’s Now Turn to Our Reports