Global Investor "Return to a multipolar world"

New trade links and strong internal demand in emerging market economies are leading to a more balanced distribution of economic power.

Zurich.-In the latest edition of Credit Suisse’s “Global Investor”, in-house analysts and external experts from the scientific and business communities discuss the ongoing change in the distribution of global economic power. Today, emerging market economies are a central factor in the global economy due to their increasing integration in world markets and rapidly rising local demand. In this new, multipolar global economy, their economic independence from the US and Europe is increasing. The populations of the emerging market nations are set to take over the role of prime growth driver of the global economy from US consumers. Investors can profit from these structural changes in the emerging markets and thereby achieve attractive returns.

For most of the 20th century, the US and Europe - though they comprised only a small, and ever shrinking portion of the world’s population - dominated the global economy. This served to strengthen the gap between rich and poor nations. For a long time, the potential of today’s emerging market economies was not exploited, despite their large populations and, in many cases, their supplies of natural resources that were richer than in the West. Their economic policies, combined with a lack of material and immaterial infrastructure - for example in terms of power supply and transportation networks, as well as educational and healthcare provision, and stability of the law - imposed a barrier to their growth potential.

Given that the US, seen in a longer-term historical context, played a subordinate economic role vis-à-vis India and China, and the dominant position of the West was only achieved in recent history, the current trend can be described as a “rebalancing”. This return to a more balanced distribution of economic power has only become possible as a result of changes in economic policy thinking, liberalization, deregulation, and integration of the emerging economies into the system of global trade. In an environment of strong growth in commodities demand, commodities exporters such as Russia and Brazil have been able to profit considerably in recent years from the strong economic growth of other regions. Despite the correction in commodity prices since the summer, when they reached an all-time high, this trend is set to continue. The current easing in prices also somewhat relieves the pressure on commodities importers such as India and China.

New Trading Links Boost Economic Independence from the US and Europe
New links between the emerging economies are changing the face of world trade. Just ten years ago, the impact of the financial market crisis on the US economy had major repercussions on economic development in Latin America. According to Javier Santiso, Chief Economist of the OECD Development Centre in Paris, Latin America’s resistance to negative developments in the US economy has, since mid-2007, been considerable. Today, the region - while not immune to fluctuations in the US economy - is far less vulnerable, given that Asia has become a significant growth driver alongside the US and Europe.

What was once the periphery is shifting more and more toward the center of the global economy. Switzerland is also a beneficiary of this development: Its export growth was never before so dependent on the emerging markets.

Strong Growth in Local Demand: Private Consumption and Investments in Infrastructure Create Strategic Opportunities
Economic growth in the emerging nations was initially supported by the export of goods and commodities, but local consumer demand is now increasingly boosting growth. Investments in infrastructure in particular are a prerequisite for continuing growth.

Strong economic growth has allowed a rising number of the world’s population to escape poverty. These people, at the bottom of the earnings pyramid, now earn enough to afford more than just the basic necessities. For international corporations, the growing needs of this group, as well as the creation of a middle class, offer promising growth opportunities. Looked at individually, people at the bottom of the earnings pyramid have only extremely modest means, but taken as a whole, given their combined numbers and their purchasing power, their growth potential is considerable. Successful companies have therefore focused their strategies on local market demand in the emerging economies for some time. This trend is likely to strengthen in future.

Investors Can Participate in the Upswing in Emerging Markets
Investors can participate in the growth of the emerging markets via direct or indirect investments in various asset classes. They can buy shares in companies in the developed nations that benefit strongly from the economic momentum of the emerging markets, or they can invest directly in selected businesses in the emerging economies themselves. The processes of structural change leading to the increasing importance of the emerging economies can also be expected to have a positive long-term impact on the development of these nations’ currencies. Currency gains, in combination with attractive returns, are also achievable through investments in bonds issued by first-class borrowers.