Book Review: Breakout Nations
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Investors have been drawn to the rapid growth and what some see as "economic miracles" among countries described as the emerging markets. A potentially profitable strategy is to spot the next country growth stock in advance, and to cash out of those countries before their growth peaks. As head of Emerging Market Equities at Morgan Stanley, author Ruchir Sharma is well-qualified to help investors in this process.
What makes Breakout Nations: In Pursuit of the Next Economic Miracles so fascinating is the author's experiences visiting and investing in so many of the emerging markets. He is well-versed in all the relevant economic statistics and financial trends. In addition, he is a writer who knows how to grab the reader's attention and keep the reader engrossed. Most importantly, Sharma challenges the popular consensus on many countries, and presents many observations and conclusions that emerging market investors must consider.
Breakout Nations starts with the number one question for all investors. What is the future growth rate of China? His conclusion is reflected in the title of the chapter "China's After-Party." Today, China is being hit by wage-driven inflation. It has grown to a size that starts to impact its growth rate. The outlook is for a slower growth rate, but not a collapse, as other experts on China have pointed out. China has a rapid growth in consumer spending.
The impact of a slower growth rate in China is spelled out in a chapter, titled "After the Ecstasy, the Laundry." The result is the end of the boom of the China-driven commodities, oil and food. The author calls this "commodity.com," and sees analogies with the dot-com speculative boom and bust.
Another popular growth story challenged here is Brazil. The economy is described as "one of the most costly [and] over hyped” that “is pricing itself far out of the competition." It is a country with a low productivity welfare state, with high interest rates, a low investment rate, a serious skills shortage, and strong currency that hurts exports. It is the "un-China."
The author's gift for concise and dramatic messages is seen in the title of the chapter on Russia, "In Russia, There's Room Only at the Top" and the chapter on India, "The Great India Hope Trick." As Sharma points out, "the consensus is typically a step behind the next big change." However, being "a step behind" can be a very costly posture for investors. If the future prospects for the BRIC countries are questionable, where are the next economic miracles?
Sharma has an array of countries to examine, including the Czech Republic, Poland, Turkey, Indonesia, and the Philippines. In the Fourth World, Sri Lanka is a candidate for review. Among the emerging nations category, South Korea is the "gold medalist." South Korea has the "rare ability to stay at the cutting edge of fast changing industries." In contrast to the consensus that the unification of North Korea and South Korea as a potential disaster, Sharma sees it as bringing coal reserves and a disciplined work force to South Korea. One clear conclusion of Breakout Nations is that each country must be analyzed on its own, rather than just be folded in the emerging markets category. Emerging markets has almost become a separate asset class, which obscures the very big differences within this sector.
Riddled with praise from reviewers and readers alike, Breakout Nations offers financial professionals information, observations, and challenges to the consensus. And unlike most of these types of books, it is a fun read.