Emerging markets could surpass G7 by 2030

27 July 2017 Consultancy.uk

Major emerging economies are projected to outperform the GDP of major developed economies by 2030. Colombia is projected to become the fastest growing nation in Latin America, while Vietnam is already among the top three most rapidly expanding Asian economies.

The emerging seven markets (E7) are set to surpass top developed economies (G7) in terms of total GDP by 2030. Continued strong economic growth and large population bases have resulted in the rapid development of the E7, which is projected to see strong economic growth in the long-term, even if countries such as Russia, Brazil and China are currently suffering contractions or slowdowns in their economic activity.

Other rising economies across the South-East Asia and Latin America are presenting attractive opportunities for international expansion, leading to booming foreign investment in the regions – according to a newly released report from PwC.

While these emerging economic powerhouses have seen an upturn in their fortunes, the major players in the global economy have seen slow growth or severe contractions during a tumultuous decade following the financial crisis of 2008. In particular, the bail-out nations have found themselves with significantly lower GDPs than Q4 2007, prior to the financial crisis. The Greek economy is around 25% smaller than it was prior to the crisis, while Italy is 4.6% smaller. Portugal too remains negatively affected, although its economy is almost achieving relative growth, while Spain is almost at levels last seen in 2007.

The US meanwhile has managed to grow its economy by around 12.5%, and the Euro zone has, on the back of lower growth to its periphery members, seen total growth reach 4.6%. While that figure seems low, at around a third that of the US, key members including Germany (9%) and France (5%), have managed to larger levels of growth.

Current size of economy compared to pre-crisis level

In the meantime, a number of the E7 have seen their economic activity impacted by global level events. The shift in China away from manufacturing and infrastructure led growth towards consumption-based economy has been implicated in the reduction of commodity prices, while a supply glut in the energy market has seen the fall in energy prices – particularly crude, as many researchers anticipate the arrival of "peak energy".

Another area of impact on emerging economies has been the ramping up of exchange rates in the US. The indirect effect has been a reduction in capital flows to emerging markets, and even considerable outflows, as US financial assets became more attractive, and investors more weary. According to PwC’s analysis, the knock on effects of continued rate rises are unlikely to be as drastic as during the 1997 Asian financial crisis.

In fact, emerging economies are cited as being better positioned to weather the rates hike. The US Federal Reserve has signalled that it is planning to raise the rate slowly, which offers companies across the regions with time to develop their foreign debt management strategies. Monitory policies, left over from the 1997 crisis, mean that many emerging economies moved towards more flexible exchange rate regimes. Meanwhile, the appreciation of commodity prices is actually positively impacting the foreign exchange reserves and export revenues – while improving investor confidence, and thereby, reducing outflows.

Vietnam’s exports are moving away from commodities, while Columbia outperforms

While large emerging economies had in recent years garnered the limelight, as they grew rapidly, then fell into various forms of crisis, a number of smaller regional economies offer ample opportunities for growth.

Top performers of tomorrow

Vietnam, PwC researchers point out, offers strong economic fundamentals, as well as a broad focus on creating long-term economic prosperity. The country is leveraging foreign direct investment to create a range of high-value export products, including mobile phones and computers, moving away from the low-cost, low-value manufacturing, favoured by other Asian economies.

The country’s economy has steadily moved away from commodity export dependence since the early 2000s and is now projected to be one of the top three fastest growing economies in Asia. It has meanwhile made key strides toward stable social and political infrastructure, which economists have earmarked as key factors to sustainable prosperity.

Colombia is another country that has in recent years offered a strong economic story, in contrast to its neighbours whose economies have suffered from various political upheavals along with economic sanctions and punitive debt levels. The most notable of these has been Brazil, who saw a contraction of 3.8% in 2014 during a sustained period of political unrest.

Colombia’s economy has enjoyed positive growth over the past seven years, although it has tapered off to around 2.5% in 2016, on the back of macroeconomic conditions. Its 10 largest neighbours, however, have seen an average contraction of -1.3% in 2016. The country is set to see its economic activity further boosted, on the back of a $70 billion investment in infrastructure spending over the coming 20 years. Colombia therefore has the potential to become the fastest growing nation in Latin America, over the coming decades.

Profile

More news on

×

Brazilian private equity market still full of lucrative opportunities

26 October 2017 Consultancy.uk

Brazil remains a strong candidate for private equity firm investment, according to a new study from BCG. The country, which is projected to experience steady growth in the coming years, has a relatively mature market with a low level of penetration.

The private equity industry has seen stellar growth over the past decades, with wealth under its management having grown to $3 trillion globally, while the number of firms active in the sector has exploded to more than 4,700.

A new report from The Boston Consulting Group (BCG) considers opportunities for the industry in Brazil. The report is based on the firm’s recent analysis into the Brazilian economy.

Economic boom

Market dynamics

Brazil enjoyed near-explosive growth between 2001 and 2011. The country's economy rose from the world’s 11th to 6th largest, on the back of consumer debt and workforce expansion. Since 2013, however, the country fell into a period of protracted decline, punctuated by a series of political scandals and crises. As it stands, the country has all but run out of the fuel that saw its initial growth spurt, and continues to be hammered by lower global commodity prices. As a result, growth is set to remain relatively modest at 1.8% till 2021.

In terms of growth by industry, a mixed bag was noted, with some industries such as mining and quarrying seeing rapid expansion between 2009 and 2012, at 43.7% CAGR, before crashing to -34.3% CAGR between 2013-2016. Construction has seen a significant drop too, as has transportation during the same period. Financial services and utilities are the only industries to have seen gains during the period. Relatively high levels of inflation across both periods put a further dampener on real growth rates.Spenging in consumer segmentsThe study also considered the different segments of the market that have enjoyed the highest level of growth during the crisis years, from 2013 until 2015, relative to the years before the crisis from 2010 to 2013. Interestingly, while spending in various segments was relatively consistent, gas stations, super markets and pharmacies all enjoyed relatively high and resilient levels of growth. Other areas of the economy saw slowdowns.

Consumers were particularly less keen on durable goods such as consumer electronics, apparel, department stores and furniture and home décor. Within the latter category in particular, spending growth fell from more than 12% CAGR to around 3%. While the economy saw contraction, the report notes that, for a large part, growth in consumer goods spending remained relatively robust during the crisis years.Global PE interest in Brazil

Private equity market potential

According to BCG, the Brazilian PE market has growth potential. The firm notes that as a % of GDP, PE activity represents around 0.31%, substantially below activity in the US of 1.41% and the UK of 1.91%. Competition remains relatively fierce, however, as a range of global players enter the market, attracted by relative maturity and lower levels of penetration.

Median deal sizes in the country also tend to be relatively lower than that of developed markets, with key players investing only comparatively low amounts per deal in the country; in total, around 63% being in the $50 million to $200 million range, compared to 47% for the US in the same period. The large number of deals in the low range, therefore, reflects tighter competition for deals.Investment activity and exists.The research also looked at PE and VC activity in Brazil over the six years, in terms of investments, dry power and other (reinvestments in companies, operating expenses and returns to shareholders).

Total investment, saw an increase even during the down period, hitting $53.9 billion in 2014, before falling slightly to $45.9 billion in 2015 and $41 billion last year. The largest segment by far was investment, followed by dry power.

Value creation has increasingly been derived from revenue growth and margin improvement, at 50% and 33% respectively in 2014, as compared to 2011 when they stood at 45% and 25% of growth respectively. Relatively low gains from leverage were reflected in the relatively high interest rate in the country.

Finally, exit activity has remained relatively steady, even while investment flows have declined considerably – falling by 39% between 2015 and 2016. Exits were predominantly from strategic buyers (45%), followed by IPO (19%).

Commenting on the result, the firm’s Heitor Carrera, a BCG partner and co-author of the report, said, “That combination of factors puts Brazil in the sweet spot for companies willing to invest in emerging economies. Over the next decade, the country will offer a rare opportunity to both global firms that want to add emerging markets to their portfolios and local firms in Brazil that want to step up their investments there.”