Morningstar UK recently hosted its 6th annual Investment Conference. At the event, Morningstar.co.uk editor Holly Cook caught up with Katie Koch, managing director of the investment management group at Goldman Sachs Asset Management and sought her views on the global economy.
Here’s the transcript.
What is you outlook for global growth and also which markets amongst the emerging markets are going to be leading the economy?
We are focused on the concept that we call growth markets, and the idea here is that we think a number of countries that the rest of the world still refers to as emerging markets have already emerged and evolved.
They are incredibly important to the global economy and so we need to think about them in a new way.
A way that gives them the merit that we think that they deserve, and those 8 countries are: Brazil, Russia, India, China, Mexico, Indonesia, South Korea and Turkey. The category that we have created is called ‘growth market’.
It's a quite simple thing. Those are the only eight non-developed countries in the world that already have at least 1% of GDP.
But in addition to already being big and important, these growth markets are going to drive most of the growth in the world over the next decade.
Specifically, we think they will be eight out of the top 10 contributors to global growth over the next 10 years. In aggregate, we think they will contribute about 60% to global GDP, and that's a pretty remarkable thing because we are optimistic actually about the pattern of world growth over the next decade.
At the conference, I plan to ask the audience whether or not they believe the world can grow faster over the next decade than the last. I've been asking that question really all over Europe actually for the past month, and audiences have been very pessimistic.
In continental Europe, only a few hands went up to say that people thought the world could grow faster. But because of the optimism that we have about the growth markets, we think it's very probable that the world growth trajectory looks better over the next 10 years than the last.
So, you mentioned some of the shared characteristics of these eight countries, are there any shared risks, or risks the investors should be aware of?
Yeah. Absolutely. The reality is that some of these countries, not all of them, but some of them are still dependent on exporting to developed markets.
For example, Turkey and Russia certainly have trade linkages into Europe, where we are seeing weaker patterns of growth. So where export markets are important, and export to developed markets are somewhat important to the economies, we need to be cautious about that.
I think, in terms of uniform risks across the rest of these countries, one thing that we have to connect with is the GDP versus the investing. So, the uniform risk across all of these countries is that growth market, equity markets still have higher volatility than developed markets.
There can be a big disconnect between the fundamentals, which are very strong for these countries in terms of sovereign balance sheets and corporate balance sheets, and the sentiment which moves as we know much more rapidly around.
So you can have a year like last year, 2011, where you had very good fundamentals from the growth in emerging markets, much higher growth than the developed world, and those healthier sovereign and corporate balance sheets.
And yet there was $50 billion of outflow of capital from the equity markets. So that disconnect between fundamentals and sentiment is a uniform risk I would say from an investing perspective across all of these countries.
Do you have any favorites among these eight, or would you recommend really diversifying across the whole eight?
Yeah, I think this is a great question. We are big advocates of diversification, right. So, let's think about it this way: there are actually over 200 countries in the world, okay, and about 30 of them are developed market countries. We can maybe use the IMF definition of a mature economy to identify those 30.
There is another 170 countries in the world that are not developed, and we're focused as I said on these eight growth markets. So what we think the growth market concept does is it creates some focus because we are concentrated on what we think is the highest quality, most important part of the non-developed spectrum; most important as defined by contribution to growth and impact on capital markets.
However, we would never recommend a client to focus their portfolio just on one or two countries. So in summary, we think growth markets is the right balance between focus, but diversification across countries with differing growth profiles, differing growth drivers.
The interview first appeared on Morningstar.co.uk, our sister UK site.