WEBVTT - Ruchir Sharma: Time To Distinguish Between EM Countries (Audio)

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<v Speaker 1>Bloomberg Business Flash. Charlie Pellett, thank you so very much.

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<v Speaker 1>Now it is time for the e t F report,

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<v Speaker 1>t F S, we turned to Catherine Connery. Investors are

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<v Speaker 1>awaiting a potential market moving event in the coming week.

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<v Speaker 1>It's something that people should be aware of because it's

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<v Speaker 1>a big variable investing in emerging markets in China right now,

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<v Speaker 1>and it's not something you would think about because has

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<v Speaker 1>nothing to do with macro, you know, situations, or the

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<v Speaker 1>FED or anything. Bloomberg Intelligence analist Eric valtunis, so what

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<v Speaker 1>is this event? MSCI will unveil the results of its

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<v Speaker 1>annual review. Assets worth ten and a half trillion dollars

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<v Speaker 1>or benchmark to MSCIS indexes. About thirty six point nine

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<v Speaker 1>billion are tied to emerging market e t s and

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<v Speaker 1>four five million in is an e t S attract

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<v Speaker 1>frontier markets. Valtuna says their speculation about whether m s

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<v Speaker 1>c I will include China's mainland stocks or a shares

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<v Speaker 1>if they say that A shares from China will start

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<v Speaker 1>to be included. China will go from say an eighteen

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<v Speaker 1>percent waiting, which it is now, and they'll add maybe

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<v Speaker 1>one or two percent at first, so it'll go up,

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<v Speaker 1>but over ten years it'll go it'll double. That's how

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<v Speaker 1>big the A share market is. We're talking about a

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<v Speaker 1>five six trillion dollar market. And that's your Bloomberg ETF report.

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<v Speaker 1>I'm Katherine Cowdery. You're listening to Taking Stock with Vim

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<v Speaker 1>Box and Kathleen Hayes on Bloomberg Radio. In December tw

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<v Speaker 1>our next guest was on the road in India. He

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<v Speaker 1>was interviewing locals in connection with the upcoming elections. His

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<v Speaker 1>new book is entitled The Rise and Fall of Nation's

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<v Speaker 1>Ten Rules of Change in the Post crisis World. He's

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<v Speaker 1>the previous author and of Breakout Nations Who Share. Sharma

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<v Speaker 1>is the head of Emerging Markets and chief Global Strategies

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<v Speaker 1>for Morgan Stanley Investment Management. Were thank you very much

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<v Speaker 1>for joining us. Thanks tell us what you learned by

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<v Speaker 1>traveling around India and speaking with locals about their lives. Well, Uh,

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<v Speaker 1>that chapter that they're referring to is called the Price

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<v Speaker 1>of Onions. And what it really told me was that

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<v Speaker 1>how concerned the population there was about inflation, and when

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<v Speaker 1>the population is really concerned about rising prices, that can

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<v Speaker 1>be the absolute deathanels for the government in power. So

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<v Speaker 1>in India, there was a lot of resentment back then

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<v Speaker 1>about what the government had done with tackling inflation, and

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<v Speaker 1>a few months later the central government lost the election

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<v Speaker 1>in the landslide victory that Narina Remodi enjoyed in Mayo.

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<v Speaker 1>So therefore, I think that inflation tears you a lot

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<v Speaker 1>about what's happening in the country, how much is it investing,

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<v Speaker 1>and what is the political mood like in a country.

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<v Speaker 1>And so I think that was it sort of solidified

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<v Speaker 1>that opinion. Uh, it's such a great time for a

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<v Speaker 1>book like yours to come out, and of course as

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<v Speaker 1>your second big book on e t s. And a

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<v Speaker 1>story this week on Bloomberg mentions that assets of black

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<v Speaker 1>Rocks flagship e t F from Emerging Market Debt Search

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<v Speaker 1>to six and a half billion dollars is eclipsing the

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<v Speaker 1>largest mutual fund in the category ETFs gaining ground. But

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<v Speaker 1>I think the story here is really the interest that

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<v Speaker 1>people have now in emerging markets. I guess it's partly

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<v Speaker 1>because they can't get so much return in US and

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<v Speaker 1>other developed countries, and they're we're willing to take a

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<v Speaker 1>gamble on emerging markets. But the emerging markets have underperformed

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<v Speaker 1>a lot this decade, and I think that there is

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<v Speaker 1>a growing view now that maybe the worst is behind us.

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<v Speaker 1>The valuation of the entire asset class looks very appealing.

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<v Speaker 1>But of course, as you know that as an active manager,

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<v Speaker 1>I cannot be endorsing e T s and we have

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<v Speaker 1>at least sort of always beat in the benchmark. And

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<v Speaker 1>I think that the entire issue here, and that's what

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<v Speaker 1>I speak on about in my book, is that to

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<v Speaker 1>stop talking about emerging markets as a homogeneous entity. That

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<v Speaker 1>you know, this is nearly the global economy now and

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<v Speaker 1>we need to distinguish the good, the average, and the

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<v Speaker 1>ugly within that very large space. And so that's what

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<v Speaker 1>I try and do that try and sort of see

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<v Speaker 1>what are the ten most important things to look at

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<v Speaker 1>to try and distinguish between different countries. And we have

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<v Speaker 1>seen that this decade that you have countries like Philippines

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<v Speaker 1>which have done very well. On the other hand, the

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<v Speaker 1>countries like Brazil have been an absolute economic disaster, and

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<v Speaker 1>I think that that's what we have to do here,

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<v Speaker 1>which is to sort of spot the winners and separate

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<v Speaker 1>them from the losers. And that's the game that you

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<v Speaker 1>always have some winners and losers. In such a large space,

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<v Speaker 1>we see the good the bad, and I'm not going

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<v Speaker 1>to win include the ugly because i want you to

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<v Speaker 1>speak about a chapter about good billionaires and bad billionaires

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<v Speaker 1>and what we can learn. Yeah, you know, like five

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<v Speaker 1>years ago, I would have not included a chapter on

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<v Speaker 1>reading income in equality in a country, but it's become

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<v Speaker 1>such a big global issue now and everywhere I go

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<v Speaker 1>from Soul to Santiago, income inequality is a very big issue.

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<v Speaker 1>The problem is that how do you get a proper

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<v Speaker 1>read on income in equality? The data that economists look at,

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<v Speaker 1>like Genie coefficient and other such stuff is very backward looking.

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<v Speaker 1>And what I'm trying to do here is to figure

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<v Speaker 1>out that when is it that the popular mood in

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<v Speaker 1>a country turns against the rich or turns against the

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<v Speaker 1>wealth creation. And that way I my sort of method

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<v Speaker 1>that I've developed is to look at the good and

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<v Speaker 1>the bad billionaires in the country. What do I mean

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<v Speaker 1>by that, which is that when a country is producing

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<v Speaker 1>wealth in the so called good industries, which is industries

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<v Speaker 1>which reward genuine and um entrepreneurial talent, like in manufacturing,

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<v Speaker 1>like in technology, that's good billionaires. On the other hand,

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<v Speaker 1>when you're producing wealth in industries such as um real estate, mining, commodities,

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<v Speaker 1>often with the help of government connections in that country,

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<v Speaker 1>or because you inherited a lot of that willth that

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<v Speaker 1>is perceived as being bad. So what I try and

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<v Speaker 1>do is to have a look all the time at

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<v Speaker 1>the ratio of good to bad billionais in a country

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<v Speaker 1>and what that tells you about countries fate. You know,

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<v Speaker 1>so many great chapters. Let's take a look at why

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<v Speaker 1>democratic capitalism beats the Chinese brand, because over the past

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<v Speaker 1>ten years or so, there are a lot of people saying,

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<v Speaker 1>oh that this the brand of Chinese capitalism works best

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<v Speaker 1>for them and probably better than US style capitalism would.

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<v Speaker 1>And of course now we see the China economy slowing.

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<v Speaker 1>We see George Soros of the past, you know, four

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<v Speaker 1>or five six months uttering words here and there about

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<v Speaker 1>a debt bomb that's about ready to go off in China.

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<v Speaker 1>Very very cautious there. What do you see? Yeah, I

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<v Speaker 1>think that as far as China is concerned, UH, its leadership. UH.

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<v Speaker 1>You know what, there's a lot of right for the

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<v Speaker 1>country till about two thousand and eight or so, and

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<v Speaker 1>then that same authority in leadership, which could take very

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<v Speaker 1>quick decisions, began this huge stimulus program in UH at

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<v Speaker 1>the depths of the crisis, and there's still paying a

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<v Speaker 1>price for it. So my point here is the fact

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<v Speaker 1>that authority in governments can make quick decisions, but they

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<v Speaker 1>either get it very right or very wrong. And when

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<v Speaker 1>they get it very wrong, there are no checks and

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<v Speaker 1>balances to put them on the right course. And also

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<v Speaker 1>for every success story like China, I can point out

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<v Speaker 1>to you many authority in regimes in Africa and Latin

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<v Speaker 1>America who got it totally wrong. So it really depends

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<v Speaker 1>on the quality of the leadership. And in China's case, UH.

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<v Speaker 1>I think what's happened is this that till about two

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<v Speaker 1>thousand and eight they were moving towards a more market

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<v Speaker 1>oriented economy and also that dead levels were quite stable.

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<v Speaker 1>But since then they've gone into reverse gear, which is

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<v Speaker 1>that the state has become more interventionist and that debt

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<v Speaker 1>levels have expluded. Here's one statistic which tells you as

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<v Speaker 1>to why you should be worried about China. Um, it

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<v Speaker 1>takes now six dollars of debt to create a dollar

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<v Speaker 1>of GDP growth in China. At the peak of the

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<v Speaker 1>U S housing bubble in two thousand and eight, it

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<v Speaker 1>took three dollars of debt to create a dollar of

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<v Speaker 1>GDP growth in uh the US. So that's how out

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<v Speaker 1>of balanced China has become today and how rapidly debt

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<v Speaker 1>is growing to sustain an increasingly slower economy. First years

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<v Speaker 1>speak about the United States if you can. You talk

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<v Speaker 1>about deep trade links, strong manufacturing and technology, as well

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<v Speaker 1>as good billionaires such as Bill Gates, but you also

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<v Speaker 1>have a debit side. Yeah, I think that. You know, like,

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<v Speaker 1>in no country in the world today, are we going

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<v Speaker 1>to be able to find a country that hits all

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<v Speaker 1>my ten rules and sort of checks all the boxes.

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<v Speaker 1>I think that's so to put that in perspective or

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<v Speaker 1>it's very easy to get pessimistic about a country because

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<v Speaker 1>it's very easy to find fault with a country because

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<v Speaker 1>no economy is growing at the pace that it was

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<v Speaker 1>growing last decade, from China to India to Brazil to

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<v Speaker 1>the United States. But we have to keep in perspective

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<v Speaker 1>that you have to compare countries on a relative basis,

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<v Speaker 1>and in that regard, I think where the United States

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<v Speaker 1>is still doing relatively better than many developed countries because

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<v Speaker 1>it's demographics are better, it's working. Each population is at

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<v Speaker 1>least still growing compared to many other countries where it

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<v Speaker 1>is shrinking, including in China. Now it's dead level has

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<v Speaker 1>stabilized after growing very rapidly last decade. And I also

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<v Speaker 1>feel that on some of the UH metrics, such as

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<v Speaker 1>the good billionaires, the United States still does better than

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<v Speaker 1>many other countries. That's why in very few other countries

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<v Speaker 1>would a billionaire be able to make a run for

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<v Speaker 1>a president, as is the case here, because in Russia

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<v Speaker 1>to Mexico billionaires are so hated in those countries. That

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<v Speaker 1>is a taste of what you're going to get when

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<v Speaker 1>you read a very interesting new book, The Rise and

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<v Speaker 1>Fall of Nations, Forces of Change in the Post Crisis

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<v Speaker 1>World by Rouchier Charmer, Rochier says, you can't talk about

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<v Speaker 1>emerging markets anymore. You have to go country by country.

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<v Speaker 1>This is taking stock on Bloomberg Radio