The World’s Center of Gravity Continues to Tip in Favor of Emerging Economies

Oranges were once expensive luxuries in northern climates.

Today, we take for granted that we can eat apples, oranges, and bananas all year round if we choose. It doesn't matter where you live. We can eat strawberries in the dead of winter. In fact, we routinely enjoy goods that come from places very far from our own doorstep.

Televisions from Taiwan, lettuce from Mexico, shirts from China; goods from faraway places are so common it is easy to forget how recent such miracles of commerce are.

Such miracles of commerce have redrawn the economic map. The emerging markets have "emerged" and big opportunities are emerging in something called the Great Convergence.

In the late 20th century, with the gradual spread of the Industrial Revolution to the developing world, the Western world (ex-Japan) represented 90% of the world's manufacturing output as late as 1953. America's economy alone was nearly half of the world's industrial output.

During this time, the economic gap between China and Western Europe grew very wide when viewed in historic terms. But things changed in the late 20th century. The Great Convergence began. From 1950 on, the world economic growth was quite simply astonishing. We enjoyed a rolling wave of "economic miracles" through the decades. Closed economies opened up and trade expanded.

We can point to the success of postwar Japan and then to the surging tiger economies of East Asia. Singapore, Hong Kong, Taiwan and South Korea grew in leaps and bounds. Finally, we saw the opening up of China, India, Russia and Brazil. The once-bottled-up energies of these countries poured out.

Today, we see the handiwork of the Great Convergence taking shape. The distinctions between "emerging markets" and "developed markets" are starting to disappear. Indeed, the terms may already be obsolete.

The belief that companies in the US, Western Europe or Japan are better managed than in emerging markets is also no longer valid. Anyone who has sat through the parade of fraud and corporate malfeasance of recent years in the US will find it hard to argue otherwise.

The list of corporate thieves is much longer in the US and Europe than in the emerging markets. Management teams in the West no longer dominate when it comes to standards of best practices.

Governments in the West are just as bumbling as those of emerging markets. More and more, it is the Western governments that steal too much. Another distinction blurred.

Emerging markets now make up about half of the global economy and not surprisingly, emerging markets now make up 10 of the 20 largest economies in the world. India is now bigger than Germany. Russia is bigger than the UK. Mexico is bigger than Canada. Turkey is bigger than Australia.

In a stock market sense, these places have also grown up. It used to be that emerging markets were not very liquid or very big. It was not that long ago that the IBM shares changing hands in a single day in New York were worth more than all the shares that traded hands in Shanghai or Bombay.

Today's emerging markets are large and liquid. Chinese markets traded more shares than the NYSE; Hong Kong and Korea traded more than Germany; India traded more than France; and Taiwan traded more than Italy, Australia or Canada.

Emerging market companies are also growing faster. In particular, there are wide gaps in the growth rates of sales and profits. The second key distinction worth noting is that of balance sheet strength. Emerging market companies have less debt and cover their debts more comfortably.

All of this is to point out that investors need exposure to emerging markets, or at the very least, they should not shun them for reasons that are no longer valid.

A good way to get exposure to emerging markets is through the back door, so to speak. Invest in companies, wherever they are, that have what these economies need or want, but don't have or can't make.

I favor a quote from Steve Forbes. Forbes says that pursuing additional financial education and the resulting increase in our financial literacy will open our eyes to alternative wealth creating strategies and this will be they key to resolving our financial crisis.

As an example of alternative wealth creating strategies … consider investments in energy assets that are inherently useful like oil rigs, hydropower, or methanol plants … perhaps precious metals, water rights, oil, natural gas, potash mines, food commodities, or gold mines … things hard to build, difficult to replace, and costly to substitute … definitely not financial stocks, definitely not retail stocks, definitely not commercial property.

I trust this article provides a little more insight into the convergence of the developed world and the emerging markets. With the gap between these markets disappearing on many dimensions and with the companies in these regions growing faster, it is wise to have exposure to these markets or at least to invest in companies that have what these economies need.

I will continue to introduce alternative wealth creating strategies to consider in future articles and updates at my blog over the next few weeks.

As a former engineer with General Dynamics and management consultant at Deloitte … I am on a mission to empower individuals by increasing their financial literacy, improve their ability for personal sustainability, and contribute to the program that has a goal of creating 100 Millionaires by 2012.

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When not traveling for business or pleasure, Mike operates his own Internet Marketing company and consulting firm from his home in the mountains of Colorado.

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