• Investment Management

The Good, the Bad and the Average

Ruchir Sharma lists countries he thinks will fare better over the next five years because of healthier fiscal habits, low credit growth and other reforms.

It’s easy to name the countries that have been on a bad binge of late. China is sure to be top of mind, with its debt-to-GDP at 282%, as well as Russia, which has failed to make good use of its oil revenues in the good times. Yet there are also countries that have taken fiscal spending to a more constructive place, according to Ruchir Sharma, head of Emerging Markets and chief global strategist at Morgan Stanley Investment Management.

In his recent book, The Rise and Fall of Nations, a New York Times bestseller, Sharma outlines a series of macro rules he applies to sort countries into the good, the bad and the average.

India and Mexico fall into the good category. They’re among countries, according to Sharma, that are more likely to fare better than others because their current political leaders are pushing through critical reforms. Mexico has weakened monopolies and opened up the energy sector to foreign producers, for instance, while India’s Prime Minister Narenda Modi has introduced a sweeping series of reforms to modernize its economy. Those moves have helped create investment environments that should steer domestic savings and foreign direct investment into infrastructure and manufacturing, rather than into boom-and-bust sectors like real estate.  

Manufacturing is Key

Sharma argues that manufacturing done well can help create a country’s middle class, with incomes better able to support domestic consumption-led growth. It’s why Germany is Europe’s powerhouse, with a solid export economy bolstered by labor-market reforms to improve competitiveness.

Manufacturing also spurs innovation, technological development and an infrastructure build-out to ensure any export wins can be maintained and grown over the longer term, rather than becoming bottlenecked.

Surprising entrants in the “good” category include the Philippines, Indonesia and Vietnam, which are increasing industrialization and seeking to improve woefully inadequate infrastructure.  Although corruption in Mexico is a negative, the country gets a Sharma nod of approval for making positive moves to increase competition and improve prospects for consumers.

China is the poster child for many excesses, most particularly for a massive issuance of credit since 2008 that led to binges in real estate and the domestic stock market.

“These binges leave little in the way of productive assets left behind for future growth,” says Sharma.

The “bad” category includes countries that failed to use their riches from the days of booming commodity prices to diversify their manufacturing base or invest adequately in technology and infrastructure. Russia and Brazil are clear examples, but it’s not just the emerging markets on his bad list. Countries like Canada and Australia, while hardly comparable to Brazil and Russia when it comes to the need for political and economic reforms, could still do more to diversify their reliance on commodity exports, Sharma says.