The latest letter from Goldman’s Jim O’Neill highlights the fact that several countries that are called “emerging markets” are not only the world’s big growth drivers, but also among the most fiscally sound sovereigns around.
Take Indonesia. It’s got a deficit of 2% of GDP, and total net debt to GDP of just 26.9%.
Given that this is the exact opposite of what’s going on in the “developed world”, O’Neill asks three really good questions about the lens through which investments are viewed:
1. Why do people persist in calling these fiscally sound drivers of world growth “emerging markets?”
2. Why do we all derive the risk-free rate from the G7 world’s bond markets?
3. Why are so many people still benchmarked to such out-of-date things as the MSCI?
O’Neill puts forth one answer:
Amongst the possible answers to all three questions is that the current fiscal and debt positions of all the countries discussed are simply aberrations that emerged over the past decade or so, and the future might be nothing like the past. This is, of course, distinctly possible. It also might be that many of the Growth Eight will somehow stop growing so strongly. And it could also be true that Japan, all of Club Med, the UK and the US are going to solve their structural fiscal challenges and grow sharply. It is also true that Manchester City could one day become England’s most successful football team!
In other words: If you think the current state of things is temporary, you need to re-screw on your head.
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