2015 Predictions: Emerging Markets

Stephen DeAngelis

December 18, 2014

Sustained global economic growth primarily depends on continued growth in emerging markets. New middle class consumers in those markets will hopefully spark that growth as they find themselves with a little more discretionary spending money in their pockets. If the global middle class does continue to grow, it will have significant impacts on manufacturing, supply chains, and retailing. The bad news reports Karen Higginbottom (@KarenHigWork), is that emerging market workers may have less (not more) cash in their pockets during the coming year. She writes, “Key emerging markets which have proven to be the boom economies of the last decade will experience below inflation increases in pay, according to research from management consultancy, Hay Group.” [“Real Wage Cuts Predicted For Workers In Key Emerging Markets In 2015,” Forbes, 8 December 2014] This isn’t too surprising considering the fact that Russia has already warned that it will, in all probability, suffer recession next year as international sanctions continue and oil prices remain low. Low oil prices and decades of bad economic policies are also affecting Venezuela where inflation is running near 60 percent. Fortunately, most emerging market countries are not experiencing inflation quite that severe. “Although salaries across the globe are set to rise by 5.4% on average for 2015,” Higginbottom explains, “this increase masks a significant slowdown in emerging markets like Brazil, Russia and Ukraine. Workers in these countries can expect to see salary rises of 6.1%, 6.8% and 6.8% respectively. However, with higher anticipated inflation, employees will experience real wage cuts of 0.4%, 0.7% and 3.9%.” Despite this bad news, Goldman Sachs predicts that the global economy will continue to grow. To hear more about why its analysts are optimistic, watch the video that can be found by clicking on this link.

Peter Coy (@petercoy), Bloomberg Businessweek Economics Editor, sums up the coming year this way, “OK, everybody, let’s get excited about 2015. Sure, there’s Ebola and Vladimir Putin and Islamic State terrorism. Western Europe is back in an economic rut, Japan’s recovery is faltering again, and China looks as if it’s headed for its slowest growth since 1990. But there are good things happening, too. Like, well, strong sales of recreational vehicles made in northern Indiana!” [“2015 Global Economic Outlook: Better Than 2014—but Not By Much,” Bloomberg Businessweek, 6 November 2014] Coy adds, “Whether you’re the CEO of a multinational or a sole proprietor, it pays to have a sense of where the opportunities lie and the dangers lurk in 2015.” The focus of this article is predictions about emerging markets. What’s hot and what’s not?

The Conference Board agrees with Goldman Sachs that the global economy is not going to be hot, especially in some emerging markets. “Barring major geopolitical upheaval,” the Board writes, “global economic growth in 2015 will hold at a rate of 3.4 percent in 2015. … China will continue its ‘soft fall’, as government stimuli will have less effect and monetary policy will become tighter. Other major emerging markets will continue to grow, but growth will vary, depending on the pace of reforms. New geographies for growth, such as Africa and parts of Asia, offer opportunities to build sustainable growth models, but they also bring challenges on economic, legal, and institutional fronts. Downsides to the global outlook relate to intensifying political and economic risks; upsides relate to the ability of policy and business to invest in people, raise productivity, and rebuild trust and confidence.” The company offers the following quick “Insight Minute” look at the economy.

Despite the semi-gloomy picture painted above, funds europe reports that many fund managers are trying to convince their clients that investing in emerging markets is a good bet. [“Fund Managers Predict 2015 Growth for Emerging Markets,” funds europe, 1 December 2014] “Fund managers expect emerging markets to be a key growth area for clients in 2015, according to a poll at a conference with over 120 managers present.”

As the Conference Board prediction notes, you cannot lump all emerging markets together and make a rational prediction since they don’t form a homogeneous group. Analysts at the Capital Group Companies agree. A few years ago they wrote, “The emerging markets comprise a broad range of countries at various stages of economic development. Nevertheless, several economies with critical mass will influence the world economy and financial markets to a degree that cannot be ignored.” [“Emerging Markets 2015,” Food for Thought, June 2011] Although their analysis was published in 2011, many of the insights they made about the importance of emerging markets remain valid. At that time, they concluded:

  • It is not just about growth. The impact of emerging markets countries, companies and consumers will increase in both quantifiable and unquantifiable ways.
  • Globalization and steady improvements in standards of living for the emerging markets’ vast middle class will create both challenges and opportunities.
  • The breadth and dynamism of emerging markets’ cultures, tastes and perspectives should help redefine supply-and-demand dynamics of both goods and services.
  • Emerging markets are an important part of the investment universe by any measure, and should be a part of any investment considerations.

Although the global economy has not recovered as quickly as analysts hoped it would, there has still been significant growth in emerging markets. One of the areas where the growth outlook is still hot for emerging markets is the technology device sector. GfK predicts that the technology device market will increase by $10 billion this coming year. [“Tech Devices in 2015: Emerging Markets Dominate Growth, Increasing by 10 Billion USD,” GfK Press Release, 30 September 2014] The release states:

“GfK’s technology device forecasts cover 70 different digital device types globally and indicate that the overall market in 2015 will remain at one trillion USD, just as it has been since 2011. However, the 10 largest growth markets will increase by over $10b alone and be dominated by emerging markets. India provides by far the greatest opportunity, primarily driven by sales of smartphones, where both volume and pricing will contribute to an overall technology device growth of nearly five billion US dollars in 2015.”

That prediction is actually very good news. Smartphones mean connectivity and connectivity means progress. “No industry or household in the world will reach their future potential without access to broadband,” write Adie Tomer (@AdieTomer) and Rob Puentes (@rpuentes), “it is the electricity of the 21st century.” [“Here’s the Right Way to Build the Futuristic Cities of Our Dreams,” Wired, 23 April 2014] Mobile technology (especially smartphones in emerging markets) are going to drive marketing efforts as the digital path to purchase becomes a significant part of the emerging market business landscape. But many emerging market consumers are not going to be buying the same types of items as their developed world counterparts. Even when they do buy the same or similar products, they won’t be buying them in same quantities or sizes. All of these differences will impact what manufacturers produce and retailers sell. Just as significantly, the last mile challenge of getting products in the hands of consumers in emerging markets is very different than the last mile challenge in the developed markets. This is especially true when it comes to serving those at the bottom of the economic pyramid.

With wages stagnating for many middle class emerging market consumers, manufacturers and consumers would do well to look more closely at how they can serve the bottom of the pyramid market. Helping provide necessities to lower income families would be a win-win-win for manufacturers, retailers, and consumers.