It has already started, it has been happening for some time and we do not believe that there is anything at this point that will reverse the direction global markets are moving.   There is a fundamental shift that is occurring where the “Emerging Markets” are gaining in global prominence and the developed economies of North America and Western Europe are declining. 

This transition has been many years in the making.  In China one might say that it began with the economic liberalizations started by Deng Xiaoping or in India with, then finance minister, current Prime Minster Manmohan Singh in the early 1990’s.  As far determining when the shift began is all academic, but the bottom line is that we are in the midst of it.

Since the widely quoted paper was released by Goldman Sachs at the end of 2001, which the coined the term “BRIC” (Brazil, Russia, India and China), remarkable growth has occurred in many emerging economies.  For example, since Goldman Sachs’ BRIC report, China has grown from a GDP (Gross Domestic Product) of $1.080USD Trillion in 2000 to a current GDP as of the end of 2009 of $3.206USD Trillion.  In India a similar pattern has been exhibited where they grew from $0.474 Trillion in 2000 to as of the end of 2009 $1,177USD Trillion.  Between 2002 and 2007 this represented a growth rate of 13.7% and 10.2% on an average annual basis respectively, whereas in the United States the economy grew at an average annual rate of 2.9% over that same period.  Keep in mind, Canada and similar western countries like Australia have very unique characteristics that differentiate them from the core western countries (more to come on this topic in the future).

Over the last decade, when we compare how the growth was achieved, a startling discrepancy occurs when you compare how the western economies grew as opposed to the developing economies.   In the west, as we all know from 2008’s “Great Recession”, our growth was achieved on the backs of over levered consumers drunk on home equity lines of credit.  GDP growth in the developing economies was based partially on selling goods to the over levered consumers of the west at discount rates, but more importantly they grew organically as hundreds of millions of consumers entered into the economic middle class.  This is not the middle class we know in the west where consumers are purchasing new homes, third cars and condos in the mountain.  This emerging middle class is purchasing fridges, stoves and quite possibly a Tata Nano, which is a four-wheeled car that sells for approximately $2,500 CDN.

This movement is profound from an investment perspective as it will shape the markets for many years to come.  We have equated it on a number of occasions to the transition that occurred during the industrial revolution in the 19^th century and into the 20th from the United Kingdom to the United States.  Only this time, instead of approximately 227 million people (as of 1870) in Western Europe and United States, there are well over 2 billion people in China and India alone.

For this reason, the first dinner event we hosted featured Gavin Graham, the Global Strategist from Excel Mutual Funds, who presented to our clients this very topic and its investment implications and opportunities moving forward.   We certainly believe that if a portfolio does not reflect the shifting landscape of the global economy then investors may face the possibility of sub par performance relative to overall world economic growth.

To View Gavin Graham’s November 16^th presentation click on the below link.  Please give us a call should you wish to discuss in more detail how this transition applies to your portfolio going forward.

Gavin Graham's November 16th Ottawa Presentation