Global Investing with a Long View

We’ve written before about the merits of investing internationally, usually from the perspective of diversifying geographically as part of well-balanced investing strategy. New estimates on global growth rates from the Economist Intelligence Unit (EIU), a research team within The Economist publishing group, shine some fresh light on reasons why investors should consider going global with their investing.

WHERE THE GROWTH WILL BE

The ranks of the world’s largest economies are going to be shaken up over the next 35 years, with many developing market countries displacing more currently mature economies. While that’s an exceptionally long time horizon to focus on, keep in mind it won’t all happen at once when 2050 dawns. It will be a drawn-out, gradual, but likely inexorable march over the next several decades, which gives investors plenty of time to invest in a major global trend. And it’s not just about some countries growing more rapidly than others and re-placing the traditional order. It’s also about the global pie getting larger, meaning established economies will also benefit from the growth in the developing world.

China and India stand out as economies with the greatest growth prospects, mainly based on favorable demographics. China is expected to overtake the United States as early as 2026 in nominal gross domestic product (GDP) in dollar terms. By 2050, China, the US and India are expected to be the three largest national economies in the world (India currently 9th, US 1st, China 2nd). All three are forecast to be larger than the next five countries combined, representing a concentration of wealth at the top that the EIU calls “unique in recorded history.”

Russia and Italy will drop out of the top ten largest economies (currently 10th and 8th) and be replaced by Mexico (expected to be 8th) and Indonesia (forecast to be the 4th largest economy in the world in 2050).

WEALTH INCREASES, BUT STAYS SKEWED

While the growth in the size of the economies is expected to be phenomenal, relative wealth as measured by per capita incomes will still be skewed to the leading mature economies. For example, China’s per capita income is forecast to nearly rival Japan’s by 2050, and be just under half of US income, up from about 14% in 2014. India’s per capita spending power will grow from around 3% of the US level to around 24%. Overall, Asia will account for 53% of global GDP, while Europe’s relative share will decline.

Part of the reason why the relative wealth levels will remain so skewed is that populations in the developing economies will continue to increase, while many of the mature, developed economies will see declining population numbers. See the table below for the largest expected declines in labor forces.

INVESTING TRENDS TO FOLLOW

The new century began with great promise for China, India and many other developing economies. That trend has only just begun and has many more decades to run. The rise of Asia and other emerging markets is an investing theme that warrants serious consideration for investors of all stripes.

Investors have a range of options available to position their portfolios to take advantage of the rising tide. The most direct way would be investing in individual stocks of the leading companies in the fastest growing economies, potentially through US-listed ADRs (American Depositary Receipts). Assembling a portfolio of ETFs that track the major stock indexes of the fastest growing countries offers an alternative with greater diversification. There are also many ETFs that focus on regional based emerging markets, such as a global emerging market index ETF or one that focuses on Asia excluding Japan, for instance.

The rapid growth out of the developing world won’t just stay concentrated there either. Established global brands located in mature economies are well-positioned to benefit from the expected growth in Asia and other fast-growing economies. As their wealth increases, consumers in these rapidly growing economies will increase their consumption of the world’s best known brands, driving profitability at leading global companies. An investor might have her eye on the expected long-term growth in India or China, but an investment in a US or German company that has a strong presence in those countries could be just as smart a way to play this global mega-trend.