Greece is about to tumble out of the eurozone. Britain is about to quit the European Union. The Federal Reserve is about to raise interest rates for the first time in nine years. Abenomics may collapse before it has done anything to revive the Japanese economy.
The markets are dominated by day-to-day dramas that quickly take up everyone’s attention – and may well create the impression the whole system is about to collapse.
Yet, rather more quietly, something far more significant may be happening. Some major new stockmarkets are starting to open up. Such as Iran, Saudi Arabia, Vietnam and, of course, China, which, despite the falls of the last two weeks, is still on course to grow into the biggest in the world.
In the medium-term, the markets are driven mainly by the development of new economies that you can actually invest in – and, on that measure, the outlook is a lot better than the day-to-day headlines might suggest.
Vast emerging markets
Take Iran. Ever since the Shah was overthrown in the 1970s, it’s been off-limits for Western firms and investors, sealed off behind a wall of sanctions. But President Obama seems set on a deal over its nuclear weapons programme as part of his legacy before he leaves office, and if that can be finalised in the month ahead, then sanctions can gradually be lowered.
That is going to open up a vast new market. Iran is a big country, and potentially a wealthy and stable one. It has 78 million people, and that figure is growing fast. At $437bn, it’s already the 27th-largest economy in the world, similar in size to Argentina and ahead of Austria or Thailand. It could certainly be as important as Turkey, and perhaps more so – Turkey, after all, does not have any oil. It could easily become one of the hottest emerging markets.
But Iran is not the only big new economy opening up. Saudi Arabia has, of course,been a wealthy country for a long time – it is hard not to be when you have that much oil. This year, it has finally opened up its stockmarket to foreign investors. True, there are still plenty of restrictions, and it is hard to know whether the country can ever diversify enough to remain stable and keep growing as oil declines in importance. But it is a big market – at $570bn, it is already bigger than Russia or Mexico.
The same is true of Vietnam. From September, the rules that limited foreign ownership of Vietnamese companies to 49% will be lifted. You can buy the whole lot if you want to. Again, Vietnam is hardly short of potential. With 90 million people, and growth of nearly 6% a year, it could easily grow as fast as Taiwan and South Korea did a generation ago as it liberalises its Communist regime.
Then, of course, there is the really big one: China. Admittedly, investors may not want to know about China right now, after the collapse in its equity markets over the last fortnight. But hey, did anyone out there seriously think China was going to be anything other than aroller-coaster ride? The fact remains that, over the medium term, it will be a huge equity market – and quite probably the biggest in the world. Late last year some of the restrictions on foreign investors were ended – which was one reason equities rose so rapidly in the early part of 2015.
What really matters to investors
Over the medium term there are two things that really matter to investors: how fast an economy can grow, and how open it is for investors. There is no point in having a rapidly growing country if you are not able to buy any shares in its companies. And there is not much point in having the most open, transparent and well-regulated stockmarket in the world if the economies and the companies traded on it are going nowhere (just take a look at some of the eurozone bourses for evidence of that).
But those four countries have the potential to provide both – faster growth and increasing openness to outside investors. They may be joined by others as well, especially if Africa and the Gulf can keep growing.
In reality, many stockmarkets in the developed world are going to struggle in the next decade. Most are only at, or around, their highs of 2000, which means there have been 15 years without any meaningful growth. Economies are stagnating and the growth of private equity and other alternative investment markets means fewer companies are listed every year. Growth is pretty meagre and what there is is not necessarily going to be shared with outside investors.
But the new markets are different. They are hungry for capital and they are packed with developing companies that can grow at a rate that will make most British, American, or German rivals seem sluggish. If you can buy into them for the first time, then the chances are that they will provide decent profits.
Fast-growing companies in developing economies, along with technology, are what really drive returns in the medium term. Most of the rest is just background noise. And on that front, there is a lot more good news around than bad.