Does GDP even matter? Capturing Profit in Emerging Markets

07 July 2016


When the International Monetary Fund (IMF) knocked a few basis points off of its global GDP forecast, economists and investors from around the world mourned the onset of an ‘increasingly dour outlook’[1] for the global economy. [2] The downward revisions prompted financial observers to question underlying fundamentals pointing to a potential recession, such as a mountain of global debt, overpriced equities, a lack of investible assets, and the perceived failures of central banks to stimulate demand.

Questions arise as to whether GDP (gross domestic product) is actually an appropriate measure of productivity, and hence economic growth and prosperity. The use of GDP originated during the interwar period, between the Great Depression of the 1930s and the Second World War. In the US, at the request of President Franklin Delano Roosevelt, economist Simon Kuznets developed a concept of measuring national income, economic welfare, and output, then called Gross National Product (the historical predecessor of GDP). Across the Atlantic, John Maynard Keynes further developed the concept, to assess how much living standards would need to fall in order to cover the cost of Britain’s war effort.[3]

Needless to say, much has changed in the global economy since the first publication of US GNP statistics in 1942.[4] In an age of driverless cars, e­-commerce, and the sharing economy, how are welfare, income, and productivity measured? How does one accurately capture the value of ‘big data’ – such as the data generated by billions of smartphone users? Moreover, how is the productivity measured of those humans or robots who mine the data? For this reason, The Economist recently called for an update to GDP – a ‘GDP plus’[5] – a new metric which incorporates services, skills, and online platforms, currently unaccounted for by the old measure of GDP. For the Economist, adopting ‘GDP plus’ more accurately reflects our current age: what the World Economic Forum calls the ‘Fourth Industrial Revolution’ – that is, the wave of technological innovation and breakthroughs upending traditional forms of manufacturing from America’s heartland to the middle of the Thar desert in northern India.

The Emerging Markets (EM) story

When investors and companies examine prospects for business growth in emerging markets, GDP figures still tend to dominate forecasts. Indeed, when China downgrades its GDP forecast, a contagion of fear sparks across Western media outlets and financial institutions, infecting not only their outlook of China, but also, of also other EMs. While the IMF predicts China’s growth to slow to a rate of 6.3% this year,[6] (down from Beijing’s official rate of 6.9% in 2015), China “bears” argue that the economy is crashing (rather than rebalancing), and that this will have a deleterious knock-­on effect on global demand, and in periphery markets across Asia, Africa, and Latin America.

This raises another key issue regarding the use of GDP statistics in EM: trusting the data. Western news sources consistently question official Chinese statistics, robustly claiming that ‘almost no one believes’ China’s numbers.[7] And as India forecasts a growth rate of 7.5% for 2016-­2017 ­ consummating its position as one of the lone ‘bright spots’ in the global economy – then observers express doubt over the validity of the figures gathered by the Reserve Bank of India, even when these figures are confirmed by Moody’s, the Western rating agency. [8].

It’s the demographics that count

But for the most sagacious business leaders, focusing on GDP data is a distraction – a smoke and mirrors game – from the real fundamentals which underlie economic growth in emerging markets – that is, the people. The demographic reality across the developing world provides a clear opportunity for profit over the long-­term: for example, in catering to an increasingly urbanized and growing middle class in China, as well as to diffused manufacturing booms, trickling from China to the shores of countries such as Indonesia and the Philippines.

Indonesia is the world’s fourth most populous country (behind China, India, and the US), and has a median age of 29.6 years old.[9] Earlier this year, President Joko Widodo initiated sweeping pro­-business reforms, easing regulations to generate foreign competition for local industry,[10] and is making great strides by investing in infrastructure and power generation across the country. In the Philippines, where the median age is 23.2,[11] the salaries of millennials are swiftly rising, relative to older generations – indicating a burgeoning working population with disposable incomes (and bucking the trend of relatively lower wages for millennials back in the developed economies).[12]

These demographic realities are reflected in the returns generated by consumer companies weighted towards emerging markets. According to the EM index MSCI, investors holding EM equities since 2002 have yielded returns of 167%. But for US-­listed companies with a large presence across the developing world (deriving at least 15% of their revenue from EMs), these stocks have generated returns of 424% since 2002.[13] For those who take the long view, whether GDP facts are fudged matters not: for profit comes by focusing on the true market, which is the potential from the population bases in these countries.

Highlighting Opportunities

Even as some naysayers forecast a huge correction in China (as a result of insurmountable levels of debt; the end of the ‘migrant miracle’; rising labor costs and wage growth, and the tapering off of a dramatic period of export-­driven growth), it is China’s ‘New Economy’​that entices leading companies and investors. Indeed, while growth in sectors such as heavy machinery and energy contracts, growth in services and technology continues a steady upward trajectory in China.[14] In demographic terms, although China’s population is aging (at a median age of 36.8 years), [15] its urban middle class is set to double in size over the next decade ; [16] and the size of the Chinese middle class has already taken over that of the US.[17] As the graph below clearly indicates, this presents an abundant opportunity for companies to provide services, healthcare and technology to a population that is changing in character, but not in size. In such a market, to focus on GDP statistics is a red herring.


In Brazil ​­ where, amidst corruption scandals, the impeachment of President Dilma Rousseff, and an economy set to contract by 3.8% this year – companies and investors are pouring in to capitalize on dislocations in the market. In fact, even as the political crisis has likely reached its nadir, external fund inflows have actually increased by $3.8bn in Q1 of this year,[18] as multinational corporations and private equity groups seize opportunities for growth, in a favorable currency environment, relative to the US dollar.

Again, Brazil’s burgeoning and youthful population of 204mn people present a long-­term market for leading companies willing to weather the current political storm.

Looking beyond pure demographic data, an analysis of long-­term trends for energy consumption indicates rosy prospects for emerging markets. As India is set to surpass China in energy consumption by 2035​,[19] this spells the growth of other correlated sectors, such as transport, power and utilities, and real estate. And, while leading companies are poised to capture profit in these capital-­intensive industries, digital companies are also positioning themselves across India, ready to reap the benefits of those dedicated to providing technological solutions to leapfrog into a new era of growth.

Certainly, each of these developing countries – and the cities that fuel them – come with their own set of problems. Complex tax and regulatory procedures, corruption scandals, and nascent infrastructure are not for the faint of heart. However, astute business leaders position themselves for long­-term success by choosing to ignore the whispers about China and GDP data. For these companies, a focus on investing and business development in demographically abundant regions takes priority. And, in markets where economic volatility and political uncertainty present factors to be managed, such dislocations reveal opportunities to capture growth that can be measured in terms of profit and generating returns, if nothing else.

Dr. Alexis Crow | Advisory, Lead, Geopolitical Opportunity |  Profile | +1 (212) 203­ 8609



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True GDP has its downsides.


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