Keynote Speaker Series: Ruchir Sharma
Transcript of interview:
Louis Basenese: All right, we’re fortunate to have Ruchir Sharma with us today. He’s the head of Emerging Markets and Global Macro at Morgan Stanley and he’s also the author of the international bestseller Breakout Nations. Thank you for joining us today, Mr. Sharma.
Ruchir Sharma: Great to be here. Thank you.
LB: Our readers have become accustomed to a really no-nonsense approach to the markets and I’m really excited from them to hear your perspectives because you’re not afraid to share the truth from your extensive travel and research. So the first question I have is really concerning America. Some are predicting the end of America is near. Yet you’re arguing that the 2008 crisis reshaped the global economy and the US is actually on the cusp of a breakout. Can you explain that thinking?
RS: Yes because I think a lot of people have been very premature in writing off America, focused on the mounting public debt but they’re possibly ignoring what’s happening on the private-sector side, and on the private-sector side, we see that America is regaining its competitive advantages in many areas, primarily led by technology that America is still the largest spender on research and development in the world and nine-out-of-the-ten largest companies in the world by market capitalization, currently, are now American again and this is being led by technology companies as they have gained a global footprint and some of the most successful product offerings still come out of America so this really remains the powerhouse of innovation and then on a more sort of mundane but fundamental standpoint if you look at the various inputs like the cost of labor, the cost of land, the cost of the exchange rate – that’s the value of the dollar – on all those metrics, America today looks very competitive so therefore we are seeing America’s share of exports in the global economy pick up, its share of manufacturing pick up and I think that all this bodes quite well so it’s really the private sector’s dynamism, which is what’s putting America back in good shape again even as the government’s debt has been mounting and, even there, this year the government’s fiscal deficit is going to be down a lot, compared to the post-crisis years, so even there we are seeing some signs of America being on the mend.
LB: Are there any areas in technology specifically that you think are very compelling right now?
RS: Well, I wouldn’t say any specific areas because, in technology, what happens is that the churn is incredible but the fact that America is at the forefront, you know, like the fact that 80 percent of the internet properties across the world are American and yet 80 percent of the users are international so I think this is what really distinguishes America even compared to, let’s say, Japan, the fact that the products that it makes have such an impressive global following whereas countries like Japan make products which work well within Japan but often have limited appeal outside the borders of Japan so that to me is a very important point to distinguish the two countries and then also the attitudes towards immigration. Now this is a very hot political issue but the fact of the matter remains that compared to most countries in the world – especially countries such as Japan – America is a much more welcoming country with more immigrants wanting to come here and I think that is again a big difference compared to the likes of Japan, then Russia’s of the world, which have a population challenge and yet their immigration policies remain very unsupportive.
LB: Let’s talk about the US dollar for a moment? Again the alarmists are gonna say that it’s a major weakness for us and it’s only a matter of time before the dollar is replaced as the world’s reserve currency but you disagree with that viewpoint, though, why?
RS: Well, just look at the history, right, which is that so much has been spoken about how the dollar is losing its reserve-currency status but the fact of the matter is there is no alternative. For the last 30 to 40 years the share of the US dollar in global foreign exchange reserves has reserves has remained remarkably stable at just over 60 percent. Even the last couple of years’ data with absolutely no evidence to suggest that central banks are holding any of the currency but the US dollar as their major reserve currency, and that really to me is a very strong point, and it’s also because the other currencies which could give the dollar a challenge, whether it’s the euro or even the Chinese renminbi, they’re really not in a position to fill in the gap that could be created by America’s declining status because it’s – they have their own issues.
RS: You know about the issues of the Eurozone are very well telegraphed. China is now facing its own issue and I think that this is a really important point for Americans to understand. Like in the book I point out that there was a Gallop Poll carried out a few months ago and the American people were asked who does it think is the largest economy in the world and they replied that the largest economy is China, which is really a shocking statement because we know that the American economy is still more than twice the size of the Chinese economy but that is the level of paranoia about China’s takeover and yet what we are seeing now is that China is facing its own debt problems that they’ve accumulated a lot of debt of to grow very rapidly in the past four to five years and that’s what’s really the big story in the marketplace these days, which is the fact that China also could be on the brink of something like a credit crisis. It may not be a full-blown one but definitely something, which undercuts its growth.
LB: As investors, everyday investors, how do we combat just getting caught up into all the optimistic viewpoints that were put out there from China about China and really drill down into what’s important?
RS: Yeah, I think that as far as China is concerned that the relatively easy parts for China, in terms of its fast growth, is now behind it. I think one sort of basic thing, which people forget is that the poorer the country, the easier it is for it to grow rapidly because, at the poor stage, you don’t have to do too much of new innovation or come up with new technologies, you just have to get the basics right of infrastructure and then other physical needs of the economy to grow rapidly so China was able to grow rapidly from a low base. Now China has become a middle-income country. Its per-capita income is more than $7,000.00. When it reaches that stage, it becomes more difficult to grow. The challenges become more complex and America’s per-capita income is close to $50,000.00 so it’s a far richer country, and so it’s very unfair to compare the growth rates of America and China.
The Chinese economy will always have the potential to grow faster as long as it is a poorer country compared to America but the more important thing is that China’s growth rate is slowing down and I suspect that for the first time in many, many years, the Chinese economy’s growth rate is going to slip below 7 percent in the next year or 2 and that’s a major comedown from the double-digit pace at which it has grown for the last 3 decades.
LB: People would argue that, hey, the Chinese consumer is really gonna save the day for the Chinese economy but do you think that’s just wishful thinking?
RS: Absolutely because the Chinese consumer has already been in action. The Chinese consumption is there for you to see everywhere, whether you are walking on 5th Avenue or in Paris or back in Beijing where I was there last week that the Chinese consumer has been spending a lot, and to expect Chinese consumption to increase even further from here is, I think, unrealistic. I mean the rate of growth, which is that a lot of people go on about the fact that the Chinese consumer is not spending enough, that’s because Chinese exports and Chinese investment have done even better so that sort of eclipsed the rise of the Chinese consumer but Chinese consumption has been rising very rapidly and I think to expect it to grow at an even faster pace is just unrealistic. Instead what’s going to happen in China is that exports and investment growth are going to all fall off as they have been and that’s what’s going to make the Chinese consumer look better but not because it’s growing faster but just because its relative share of the economy is bound to go up.
LB: You mention being in Beijing last week and in your book you tell how you spend at least one week out of every month in an emerging market. Do you have any other recent trips that you’ve done that you can share some insights from, from your travels?
RS: Well, I find it really fascinating to travel to these countries because when you’re on the ground you obsess about the country and you speak to so many people, whether it’s the politicians, the CEO’s or other investors. I was in South Africa. It’s a country that I like a lot. I was there in March but the strange thing about South Africa is that even though I enjoy visiting it so much, from a professional standpoint, I’m quite underwhelmed by their economic performance. The economy is growing at less than three percent this year. It’s for the next few years I see the American economy growing faster than the South African economy even though the South African economy is much poorer. I think that’s a very disappointing outcome.
I was also in Thailand just before I went to South Africa. I had a fascinating meeting there with the prime minister of Thailand. She’s a really charming woman and someone who is sort of bringing peace to that country after all the political tension of the last decade and, again, Thailand’s a great place to visit. Bangkok is one of the most happening cities in Asia and so that’s a city I always enjoy going to and, unlike South Africa, I think in Thailand both my heart and my head are in the same place, which is that I am optimistic, whether it’s from a tourist standpoint or from an investment standpoint.
LB: Right now I’d imagine that there probably aren’t too many direct investment plays for individual retail investors in Thailand so how do you recommend that we potentially play those opportunities? Are there any good proxies out there that you think would help capture that opportunity?
RS: Yeah, you know there are Thailand-dedicated funds but for most investors who are keen to invest in emerging markets I would really suggest investing in a diversified emerging market fund so that – and to invest in a fund where the portfolio managers making a lot of decisions about which countries to be in, which countries not to be in because getting the country right in emerging markets is extremely important. I know stock picking is also critical but getting the country right is really important because if you end up investing in the wrong country no matter what stocks you pick, you’re gonna end up losing money and the corollary to that is also true so I would say that most of these countries have their own dedicated funds, which are listed here on the New York Stock Exchange and so that’s one way of playing it if you really feel strongly about a particular country. Otherwise investing in a sort of broad, diversified emerging-market fund, to me, would really be the way to go.
LB: You had a line in a piece that I read recently that you said that “the markets tend to register changes faster than the pundits do,” and I think that’s really spot-on. I mean I always talk to our people about being contrarian and looking for turning points in the markets. Is there anywhere that you see in the markets right now that are moving in advance of public opinion, a change of sentiment, potentially, to play?
RS: Well, I’d say that there are parts of the developed world – whether it’s U.S. or Europe – where the fundamentals are turning around and yet the consensus I think is lagging. Even in Europe it’s quite, you know, instructive to see that the recent economic data out of Europe has been quite constructive in terms of better-than-what-people-were-expecting and that’s partly because expectations are so low out of Europe that any mild surprise is even good enough but we’re seeing some signs that economic activity in Europe may be stabilizing so this is another case where even though the editorials and the opinion pieces will keep telling you about how Europe is completely lost but we are seeing signs of a change there
LB: Before I let you go, I’d love to get your view on commodities. From oil to gold, they’ve been taking it on the chin lately and of course the bulls will swear it’s just a hiccup in what’s a super cycle for commodities. Do you agree with that viewpoint?
RS: Well, for whatever it worth I’ve devoted an entire chapter in the book to it where my basic take is after the ecstasy comes the laundry and that’s really what I feel, which is that we have had this extremely good decade of a boom and now the fundamentals are turning for the worse. Demand is slowing down. That’s consistent with my view on China, which is the 800-pound gorilla of the commodity marketplace. On the other hand supply is really coming on-screen that we have a new amount of capacity coming in many critical sectors in a big way, whether it’s copper, it’s oil, it’s shale gas or – I think all that’s gonna sort of put a cap on commodity prices so I find that the combination is turning around rather viciously for commodities and so, yeah, I don’t believe that this is just a sort of hiccup in a long-term uptrend. I believe that the super cycle of the past decade is now drawing to a close and commodities are reverting to their long-term pattern, which is one decade up followed by two decades down.
LB: Yeah, I like that saying, “After the ecstasy, the laundry.” I think that sums up perfectly the current market conditions. Well, I want to thank you for your time and I want to encourage all our listeners if they want to get more unique insights on global investing opportunities that they should check out your book, Breakout Nations so, again, Mr. Sharma, thank you, again, for taking the time to speak with us today.
RS: All right, good to be here. Thank you very much.