Over coffee this morning, I came upon a newspaper article about an eye-opening development in global trade.
For more than 50 years, global trade has increased more than 6% every year, and today the volume is 22 times larger than in 1950. That huge spike has catapulted many emerging-market countries into prominence as relatively cheap producers of goods and services.
However, last year, trade only increased a modest 2%, with a meager
bump to the 2.5% expected this year, less than the increase in projected global GDP. Last time trade increased by less than the global GDP over a longer period of time was from 1913 to 1947, a period remembered for heavy protectionism and two brutal world wars.
This development has many analysts wondering: Could this be the end of the emerging-market growth story?
What emerging-market pessimists are missing is that a global paradigm shift is underway. Emerging markets and developed markets are converging. The world’s central banks know this and are beginning to diversify their currency holdings as alternatives to the U.S. dollar (USD) materialize. Today, the USD accounts for around 65% of all global reserves, but that allocation has fallen for the last 15 years. And it will continue to fall.
The days of the USD as the world’s reserve currency are numbered, and that presents an opportunity for investors … at least to those who are paying attention.
There’s Still Wind in the Emerging Markets’ Sails
In 2001, the BRIC acronym was introduced to describe the emerging economies of Brazil, Russia, India and China. Since that introduction, 2013 will be the first year in which emerging markets account for more than half of world’s GDP on the basis of purchasing power. In 1990, the BRIC economies accounted for just one-third of purchasing power GDP, and back then global trade flow was far less than it is today.
The BRIC countries are now all ranked in the top 10 largest economies in the world. Free trade, tumbling shipping and communication prices have made it possible. As a consequence, the BRIC nations have all built up huge currency reserves (mainly in U.S. dollars). Collectively, the four countries have about US$4.7 trillion in reserves, with China holding about US$3.5 trillion of that.
Despite declining growth rates in BRIC countries for the last few years, I believe that the emerging markets will continue to grow as other countries on the rise pick up the slack. The U.S. and the euro zone will likely complete a free-trade agreement next year. It will be the largest agreement of its kind in history, representing almost 50% of world GDP. That will certainly boost global trade and the emerging countries that feature cheap labor, such as Mexico. Mexico had the highest percentage growth in household wealth from 2012 to 2013, with an increase of 17%. The good times should continue if President Enrique Nieto is successful in liberalizing the energy sector, allowing major oil companies to invest in oil and gas extraction off the Mexican coast.
A Challenger has Emerged …
The next step forward in this convergence will be when an emerging-market currency challenges the reserve status of the U.S. dollar and an emerging financial market overtakes one in the U.S.
Well, the Chinese renminbi is already entrenched as one of the top 10 most-traded currencies in the world. And the Chinese domestic bond market is already the fourth largest — and it’s growing at 30% a year! Plus, the Chinese government is opening up its bond market through its Renminbi Qualified Foreign Institutional Investor (RQFII) program to allow holders of licenses to invest renminbi directly in Chinese assets. The Reserve Bank of Australia has already announced that it plans to invest about 5% of its reserves in Chinese debt.
Since 2005, the renminbi has appreciated about 35% against the U.S. dollar. As I have told my Currency Cross Trader subscribers, I see the renminbi eventually challenging the U.S. dollar as the world’s reserve currency. To play that development for profit, you can purchase shares of the WisdomTree ETF (NYSEARCA: CYB), which tracks the renminbi against the U.S. dollar (long renminbi, short U.S. dollar).
Today, the emerging-market share of the total global-market capitalization is only around 15% per the MSCI all-share index, but that number is sure to increase. The transition won’t happen overnight. But the wheels are already in motion. Stay tuned