Eye on emerging markets

Emerging economies are still growing faster than developed countries, so investors must seize the opportunities beyond Canada’s borders.

So said a panel of experts at The Economic Club of Canada’s Scotiabank Emerging Markets Forum in Toronto.

The paradigms of the global economy are shifting as many emerging countries have gone from low-cost producers to target markets, said Warren Jestin, senior vice president and chief economist, Scotiabank.

“Ten years ago, the G-7 economies accounted for two-thirds of the global economy, [but] now account for less than half,” he said. “Within the next five or six years, the U.S. will no longer be the largest economy in the world. These are profound structural changes.”

Emerging countries have always had large populations, but lacked economic size. Due to astounding growth rates over the last decade, they have now built enough economic muscle to match their population advantage.

“Growth rates in the emerging world are multiples of what we are going to see in the developed world this year, next year and for the foreseeable future,” said Jestin. “This means the emerging world will account for all of the net new demand for commodities we’re going to see over the next decade. If you’re negative on the emerging world, you’re negative on commodities.”

Read: Global market optimism on the rise

Another sector that benefits from emerging markets’ exponential growth is manufacturing. “China sells more cars and trucks than Canada, U.S., Mexico combined,” said Jestin. “The fastest growing car markets in the world today are China, Russia, India, Brazil, Chile and Peru.”

That’s important news for Canada, which sends 90% of its exports to the U.S., a stagnant market. Jestin said “getting in the game in manufacturing will involve changing our view of where the markets are going to be.”

“We [must] exploit the new opportunities and develop strategies that are poised towards [emerging markets] — as opposed to focusing on the good old days when we could rely on the U.S. market,” he said. “If we stay focused on the U.S. market and [old] strategies, Canada is going to miss out in terms of growth and opportunity.”

Another panellist, Pablo F. G. Bréard, vice-president and head of international research, Scotiabank, called attention to the growing appeal of Brazil and other Latin American economies, often overshadowed by their Asian counterparts.

Making a strong case for Brazil, he called it “the powerhouse of the Americas.” The country has $240 billion worth of U.S. treasuries, four times what Canada has.

Brazil isn’t dependent on China, since it has a large local market, he added. “In Latin America, Brazil has become a key axis for stability and growth potential for investments.”

Read: Don’t bet on a China slowdown: Malkiel

Jonathan Haussman, alternative investments and fixed income emerging markets, Ontario Teachers’ Pension Plan, expressed similar sentiments.

He said Latin America is the most interesting of all emerging markets.

“Brazil is a very large, diverse and sophisticated country and we have to depart from the notion that folks who’ve made a lot of money in [Brazil] made it by tanning hide,” said Haussman. “They’ve done it by building airplanes.”

Yet, the majority of institutional investors haven’t embraced emerging markets.

“Just to get a 5% allocation to stocks and bonds in emerging markets among the institutional investors would [equal] close to $1 trillion investment,” he said.