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The author is the chairman of Rockefeller International. His new book is “What Went Wrong with Capitalism?”
In the 2000s, when a broad-based economic boom in emerging markets attracted billions of dollars into financial markets, author Fareed Zakaria described this historic moment as “the rise of the Rest.'' Similar encouraging developments are now unfolding in emerging markets, but few observers have noticed, and even fewer foreign investors have responded to this momentous shift.
A major revival is underway. Emerging economies, which weakened sharply over the past decade, are regaining a growth lead over developed economies, including the strongest of them all, the United States, to levels not seen in 15 years. The share of emerging economies growing faster in per capita GDP than the United States is expected to jump to 88 percent over the next five years, up from 48 percent over the past five years. This share would match the peak of the emerging economy boom of the 2000s.
This budding boom differs from previous booms in important ways. In the 2000s, emerging markets rose on the back of China's rapid rise, huge increases in commodity prices, and easy monetary policies by Western central banks. Many commentators assumed that China's rise would lead to a huge boom for “the rest of the world,” but they were sorely disappointed. In 2012, I was shocked by the hype and warned of the coming “end of the rest of the world.” Indeed, the next decade was a dark one for emerging markets, but a great one for the United States.
But many emerging countries are now in a much stronger fiscal position than the United States. As an overstimulated superpower, relying on record budget deficits to drive growth, the United States is on an unsustainable path. Emerging economies have much smaller budget and current account deficits, and more capacity to invest and drive future growth. Even countries once known for fiscal extravagance, from Turkey to Argentina, are returning to economic orthodoxy.
The fortunes of emerging countries are no longer entirely dependent on their largest powers. The current economic recovery is being driven by countries other than China, but their challenges — from a shrinking population to high debt — are obscuring emerging countries' strengths. Beijing's nationalistic turn and rising tensions with the West have scared off global investors, who are retreating from China and setting up factories elsewhere.
Over the next decade, exports of green technologies and the raw materials needed to manufacture them, such as copper and lithium, are expected to be particularly strong, and these are mainly sourced from emerging markets. The AI boom is already boosting exports from suppliers of AI-related chips (South Korea and Taiwan) and electronics (Malaysia and the Philippines). Investment is increasing in many emerging markets, attracted by a set of strengths, including India's large domestic market, Malaysia's favorable environment for data centers, and Mexico's proximity to the United States.
When economic growth accelerates, corporate earnings tend to follow. Excluding China, emerging market earnings are currently growing at a 19% annual pace, compared with 10% in the United States. In the second quarter of this year, for the first time since 2009, emerging market (excluding China) companies beat earnings expectations by a larger margin than U.S. companies. While emerging market profit margins are improving, in the United States they have been stagnant for 18 months.
Global stock market investors, attracted by the U.S. tech giants, have yet to react. Emerging market stock markets have seen little trading, with trading volumes in many countries falling to their lowest levels in two decades. Among the few emerging markets posting competitive profits are those with strong and rapidly growing domestic investor bases, such as India and Saudi Arabia.
Still, there are signs of change. America's growing reputation as the world's most irresponsible budget deficit country — a financial empire that takes its reserve currency status for granted — threatens to undermine the value of the dollar. In recent weeks, the dollar has finally started to weaken, which historically has led to increased capital inflows to emerging markets.
Emerging markets, long in the shadow of the United States, are becoming an increasingly attractive bargain. Although emerging markets are again posting rapid profit growth, they are trading at record low valuations compared to the United States. Over the past 15 years, the United States has delivered superior profit growth, driven primarily by large technology companies, but that is changing: Profit growth at the “Magnificent Seven” U.S. technology companies is expected to fall by more than half over the next 12 months.
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Of course, it makes no sense to lump emerging markets together in a faceless lump: The rise of the rest will mean a good decade for them, on average, but it will be led by a select set of stars, each of which will draw strength in different ways from the favorable trends of global trade, the dollar, economic reforms, and new political leaders.
Recall that until recently, many commentators were warning that emerging countries could suffer successive crises in the wake of the pandemic shock. Expectations remain low and fears remain high, so emerging markets remain off the radar of most global investors. But that is the nature of comebacks: they emerge from obscurity, and the deeper the shadow, the greater the drama surrounding the comeback, once it is recognized.
