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November 22, 2016 | Global Equity
Stronger Growth from Emerging or Developed Markets Ahead?

Global Equity Strategist

Olga Bitel, partner, is a global strategist. She is responsible for economic research and analysis across all regions and sectors. She distills macroeconomic and geopolitical developments into actionable insights for global equity portfolios within a multifaceted strategic framework. In addition, she provides insights about cyclical turning points and structural trends as inputs into portfolio construction in predominantly bottom-up investment approaches. Before joining William Blair in 2009, Olga was a senior economist at the National Institute of Economic and Social Research in London, United Kingdom, where she produced macroeconomic forecasts for most Asian economies and led thematic research projects for some of the world’s best-known international organizations, including the Organization of the Petroleum Exporting Countries and the International Monetary Fund. Olga received a B.A. from the University of Chicago and an M.Sc. in economics from the London School of Economics and Political Science.

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William Blair Economist Olga Bitel considers what drives returns in both emerging and developed markets, examining the effect market offerings and rising affluence may have. Watch the video or read the recap below.

 

Economic growth in emerging economies has outpaced growth in developed economies in the last decade, although the gap has been narrowing. Will this trend continue over the next 10 years, or will developed economies become the new growth engine? And does this really matter for investment returns?

Bitel: Indeed, aggregate growth rates matter little for financial markets returns, whether in equities, fixed income, or real estate. Instead, changes in market offerings and affluence drive returns and at the same time imply great variability in growth rates across industries and companies.

Changes in market offerings and affluence drive returns.

Department stores provide a timely illustration of how market offerings drive similar—poor—returns across markets with vastly different growth rates, such as the United States and China. U.S. retail sales have been growing at an annual rate of between 2% and 3% for the past two years. Yet U.S. department stores continue to report declining top lines and shrinking margins, while internet retailing is growing at a double-digit pace.

China’s retailers are afflicted with exactly the same phenomenon. E-commerce in China has been growing at 45% per year for at least five years. During this time, retail sales volume growth at large companies more than halved. So we see the two largest economies –one developed, one emerging. Retail sales are growing at 2% annually in one, and four times faster in the other.

Yet department stores face similar declining fortunes in both countries, as internet retailing changes market offerings. Rising affluence in China may also radically alter consumption patterns.

Staying in China, if we assume that growth slows to 3.5% annually by 2025, the number of affluent households will double to approximately 180 million, fueling rapid expansion in sales of SUVs, foreign travel, various forms of entertainment, and affordable luxuries such as chocolate and coffee.

The flip side is that lower-income households will grow more slowly, bringing down the growth rates of the goods this group favors. Sales of key consumer products for this income bracket, such as microwave ovens and soft drinks, have already slowed markedly.

With many trade and capital barriers having been dismantled already, companies shaping and servicing consumer preferences may be domiciled anywhere in the world.

Global Equity Strategist

Olga Bitel, partner, is a global strategist. She is responsible for economic research and analysis across all regions and sectors. She distills macroeconomic and geopolitical developments into actionable insights for global equity portfolios within a multifaceted strategic framework. In addition, she provides insights about cyclical turning points and structural trends as inputs into portfolio construction in predominantly bottom-up investment approaches. Before joining William Blair in 2009, Olga was a senior economist at the National Institute of Economic and Social Research in London, United Kingdom, where she produced macroeconomic forecasts for most Asian economies and led thematic research projects for some of the world’s best-known international organizations, including the Organization of the Petroleum Exporting Countries and the International Monetary Fund. Olga received a B.A. from the University of Chicago and an M.Sc. in economics from the London School of Economics and Political Science.

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