Before we talk about emerging nations let's talk about U.S. and China because in recent years the story has all been about U.S.
and China and the strength of those economies. Why is that not going to continue.
Well I think David if you look at the pattern of economic history what you find is that when nations do very well in one
decade it is very hard to repeat that kind of success in the subsequent decade. And the last decade as you pointed out really
belonged to America and China. America emerged from that as a financial superpower in a way that it almost never was. As you
well know now that 90 percent of all transactions in the world are done to the US dollar
as a financial superpower America reached new heights by the end of the decade. And China had an amazing decade with its share of
the global economy expanding very rapidly. But I think that both those nations now are going to hit or are hitting some
significant roadblocks in China. We're seeing the challenges of demographics and debt for the first time. Now the Chinese
population is beginning to shrink. I think that's a huge development. And there has been no growth story that has been
able to sustain itself where the population of a country is shrinking. And China is not exhibit A of that. And the United
States I think after a great decade. I wrote a lot about how the US was going to be the combination of the two dance. The US
seems pretty overstretched as well. And the way it has weaponized the US dollars is now in the fight against Russia. I
think we'll also have consequences with the rest of the world is fighting or looking how to get off this donor standard. So we're
sure that explains why perhaps the ISIS and China won't do as well in the next 10 years as they do in the last. What makes you
think that the emerging markets are a place to pick up the slack.
Well I think a couple of things going on for emerging markets. One I think it's really important to put this in perspective
that these emerging markets that we're talking about whether it's India Indonesia or even the likes of Eastern Europe. These
countries did not have the resources to spend that much on stimulus when the pandemic hit. So these countries really were
forced to carry out some more fundamental reform in India. The variety seems to have shifted again towards economic growth.
They are focusing more on issues like privatization Indonesia the changing the labor laws. So I think what you're seeing in
emerging markets is the difference between stimulus which the Western countries adopted in great measure and in emerging
markets which did some stimulus but not to the same extent. So they were forced to carry out foot productivity enhancing
reforms to try and revive the animal spirits. So I think that's one very important factor. The second has to do with commodities
that if you look at the history of emerging markets typically emerging markets do very well. Commodity prices rise because so
many emerging markets in Latin America Middle East Africa are big exporters of commodities. And one of the big themes of this
decade which is shaping up is that we seem to be at the start of a new commodity supercycle because we cut investment back so
sharply in commodities. And now it seems as if demand is going to still be strong for commodities even for building a new green
infrastructure. If the supply has been severely constrained. So I think that that's why this could end up being a pretty good
ticket for commodities. And that's really helpful for many emerging markets.
Shares you know very well there isn't just one class or emerging markets. Each one is quite different than the other. Take the
two things you just talked about reforms. On the one hand it combines the other which are the particular emerging markets
that might benefit from one or the other or maybe both of those. Yes I think that you have countries such as Brazil Saudi Arabia
I think some of these countries could do quite well compared to expectations. I think they bought into it. Yeah it is that the
expectations have been reset. And so no one expects these countries to do very well. But some of these countries could do
quite well because they're so dependent on commodity prices. And now you have commodity prices going higher even in places like
South Africa. The domestic demand could do quite well if the mining sector
revs up again. Now given the sweet spot where the country could benefit from both. Possibly a country like Indonesia which has
bought commodity exports and is also getting out some economic reforms. So I think it's these are some of the story lines
emerging markets that could do quite well in the coming decade. I'm sure you have a piece in Foreign Affairs the current edition
of For Foreign Affairs that struck me. And when you did a comparison of the extent to which the U.S. and China occupied
the global market of the global economy as opposed to their there the value of the stocks and how that compares to emerging
markets would suggest that perhaps the US is. Go through those numbers.
Yeah I think that this is the extreme value trade out there so to speak. But if you think about it for the next five to 10
years. So here's a snapshot. The United States study is roughly about 26 percent of the global economy but the U.S. stock market
today is over 60 percent of global stock market capitalization. That's a huge gap that's opened up a gap that was never there at
the start of last decade. The number of US 25 percent of global economy with the US a share but the share in the stock market.
Global cap was about 40 percent or so. So massive gap has opened up out here. Now some people say this is because the U.S. has so
many global companies even adjusting for that. The US shaded global stock market cap is over 50 percent. I think that's far
too much of an allocation of capital towards the United States. At the other end of the spectrum are emerging markets especially
emerging markets outside of China which account for more than 20 percent of the global economy. But their share in the global
stock market capitalization is well below 10 percent. So this like for me represents a lot of value out there which is that a
lot of capital is allocated to where the United States. The United States is very expensive today as a stock market. In fact
the US stock market today. The bit of the rest of the world is trading at 100 year high.
That's a very wide gap. And emerging markets out at the other end of the spectrum. Historically they're very cheap. The
currencies are also quite cheap. And this share in the global stock market cap is way below their economic weight. I expect
this gap to close in the coming decade. Sure. Let's talk about some things you could hold back. Emerging markets in particular
the commodities that you referred to that are good on the upside when you're selling them. On the other hand then these emerging
markets need energy and they need food as well. And often they will subsidize that for their population. Could that hold some
of the emerging markets back. Yeah. You know the thing about emerging markets I did about
hundred and fifty developing countries out there that only about 40 countries that are classified as developed so that 160
developing countries out there and that in many story lines there. And there will be some nations which will bear the brunt
of higher commodity prices as well which are large importers of these commodities. The dumb one we're seeing in Sri Lanka in
places even like Pakistan. And then also we have in places like Peru which is should be a beneficiary of high commodity prices
but not a protest taking place because of high energy prices. So there will be some countries which will get hit by that. But on
average if you look at the history of development economics what it tells you is that the decades when commodity prices do well
tend to be the decade for emerging markets. I would say that emerging markets tend to do much better with higher commodity
prices and lower commodity prices because they export so much of raw materials and energy. One final one per share. What about
how they deal with increased interest costs. Because there's a lot of external debt for a lot of these emerging markets and it
looks like interest costs are going up. That's true. Now the public doesn't have to that is that one but
many of these emerging markets have already increased interest rates. So unlike the Fed and the western central banks these
emerging markets are somewhat ahead of the curve rather than being so behind because so that shock has been partially
absorbed. The second thing is that they become much less dependent on foreign capital. The key thing to remember is this
hundred and fifty plus developing countries out there. There will be many story lines. But on balance if you look at the
picture and especially the relative picture compared to the US which is also picking on a lot of debt the prospects for
emerging markets look much better than they did a decade ago. And the US is the mirror image of that.