Mexico has a wonderful combination of a dynamic economy with an active cultural scene. Just like other markets around the world, Mexico’s stock market suffered a crash at the end of 2008 and the beginning of 2009, moving from the 2007 high of almost 32,473 points to an October 2008 low of 16,979 points, an enormous decline. Since then it has climbed steadily, more than doubling to reach 38,600 points again at the beginning of this year.
The Mexican economy has mirrored the stock market. After a disastrous 6% contraction of the economy in 2009, Mexico grew by more than 5% last year and is expected to grow by 4% in 2011. Mexico took its medicine early in the crisis with fiscal reform in 2009 which included a value-added tax and cuts in government spending. The public deficit is now only 2.5% of the GDP and is expected to decrease to 2% in 2011. Public debt as a percent of GDP is 40%, which is considered reasonable when compared to other nations around the world. More importantly, foreign reserves are building up and have risen from the mid-2009 level of US$80 billion to over US$120 billion today.
I’m saddened by the devastation and the lives lost in Japan as a result of the massive earthquake, tsunami and multiple aftershocks. I worked in Japan during the 1960s and have been visiting the country at least on an annual basis to meet with clients, even though our emerging markets-focused portfolios do not invest directly in Japan. Living on a fault line, many Japanese people have experience with disaster drills to prepare for such natural disasters. If there’s one thing that I’m confident of, it is the ability of the Japanese people to bounce back from this disaster, as evidenced by their quick recovery after the 1995 Kobe earthquake, which occurred in a more economically vibrant area.
The fiscal stimulus package to get the Japanese economy back on track is expected to be much bigger than that for the Kobe earthquake. Although Japan has a large fiscal deficit, unlike the U.S. or European countries, it also has one of the largest foreign reserves in the world, second only to China at almost US$1 trillion. Most of the Japanese debt is also domestically funded.
Over the past few months, the world’s attention has focused on events in the Middle East and North Africa (MENA), as the uprising that began in Tunisia spread to Egypt and onward to a number of countries in the region. The widening conflicts were quickly reflected in CDS (credit default swaps) spreads widening in those countries and the decline or closure of regional stock markets. Although we do not have investments in Libya, when I see what is happening there, I worry about the safety of innocent citizens. I’m encouraged by the determination of many Libyans who are fighting for more freedom and an opportunity to more fully share in their country’s economic future.
The upheavals in Tunisia, Egypt and other countries can be attributed to a complex of variables, most important of which are rising food prices, unemployment, corruption and political stagnation. Unemployment has stayed high and, more crucially, waves of new young job seekers entering the labor market have not been absorbed. As in many emerging markets, the populations in MENA countries are young—approximately one-fifth are between the ages of 15 and 24.
There will always be unforeseen factors and circumstances that might become catalysts for greater changes in the global landscape, as we have seen from the current unrests in the Middle East. No one knows what will happen in the future, but below is some of what I envision for the emerging markets landscape in the next decade.
Greater Dominance in Global Economy: I believe that emerging stock markets could be much larger than they are today and in the next decade their combined value could exceed the combined value of the U.S., Japanese and European equity markets. Emerging markets have come a long way since 1986, when the International Finance Corporation (IFC), a World Bank subsidiary, started to make efforts to promote capital market development in less developed countries. Since then, emerging countries have progressed from being simply low-cost manufacturing economies to growth-driven economies with a very strong consumer base. The importance of domestic demand in emerging countries will play an even more important role in the future as growth in developed markets is expected to be much lower, fraught with fiscal challenges. With emerging markets, growth in domestic consumption should be driven by, and hopefully sustained, in two ways: rising per capita income and, more importantly, the maturing of the young, working population who will be reaching the most productive years of their lives. However, if governments fail to keep up with this new and rising middle-consumer class, e.g. through a lack of employment and high unproductive government spending that could in turn lead to inflation, this could lead to political instability, a persistent poverty trap and a widening gap between the rich and the poor.
Throughout my travels, I have visited some countries that never cease to amaze me every time I go back, and India is definitely one of them. The country is changing and growing at an incredible pace. In 2010, India’s economy grew by 9.7%, and for 2011 the International Monetary Fund projects GDP growth to be 8.4%. However, many people do not realize that this fast pace of growth is not new and looks to be steady going forward. From 2005 to 2010, India’s economy grew around 6% to 8% each year, an impressive feat for such a large economy. Looking ahead, from 2011 to 2030, EIU forecasts GDP growth to average 6.5% a year, which would make India the fastest-growing large economy in the world during that period.
Some of the key drivers for India’s strong growth include rising per-capita income levels, robust domestic demand, more consumption from a growing middle class, and favorable demographics in terms of an increasing working-age population. We try to capture some of this growth through our investments in Indian companies, with an emphasis on commodities as well as consumer products and services.
India’s swift pace of growth means that consumption of commodities is rising fast, and the most crucial commodities are those that produce energy: oil and gas. It is a challenge for India to meet expanding energy demand, since it has less than 0.5% of the world’s oil and gas reserves but is home to 15% of the world’s population.  By 2025, India is likely to become the fourth-largest net importer of oil in the world, behind the United States, China, and Japan. An intensive search is underway — oil and gas has been discovered both onshore and offshore, which is a great boon for a country so dependent on oil imports. The search for energy is not limited to oil and gas but also extends to coal, wind and solar-powered sources.
On each visit to India, I’m astounded by the vibrancy of the consumer market, with the opening of new malls, hotels and apartment blocks, as well as an avalanche of advertising on television, billboards, movie theaters and every other conceivable advertising medium. A key driver of the rapid changes taking place in India is telecommunications—almost 706.7 million out of the total population of 1.17 billion Indians own cell phones. 
I view 2010 as a year of economic resurgence. Many emerging markets recorded strong GDP growth as they continued to recover from the impact of the 2008 financial crisis. In several cases, robust domestic consumption, government expenditure and intra-regional trade offset weak external demand from developed markets. This led many countries in Asia and Latin America to return to pre-crisis growth levels much faster than expected. China and India were among the world’s fastest-growing major economies during the year, with China overtaking Japan as the world’s second-biggest economy halfway through the year. 
Following the unprecedented fiscal and monetary expansion implemented globally in 2009, the focus for a number of major emerging economies shifted in 2010 from stimulating growth to managing inflation. Concerns about economic overheating and inflation in major economies such as China, India, Brazil, and most recently, South Korea, led authorities to steer toward the normalization of fiscal and monetary policies.
It seems we are currently witnessing a largely one-way flow of capital, as money moves from countries of disinflation or deflation to countries with inflation, possibly perpetuating the situation for both. Most developed economies are still mired in slow growth, prompting measures to kick-start their domestic economies such as continued loose monetary policy, quantitative easing and government bailouts, while deficits are spiraling out of control.
The rapid growth in money supply stemming from these expansionary policies is leading to rising commodity prices as investors have higher inflation expectations and thus invest in commodities and equities. This, of course, pushes up domestic prices since the value of raw materials is increasing. As a result, authorities in emerging economies with high growth, such as Brazil, China and India, are trying various methods to prevent their own economies from overheating.