Ruchir Sharma is the chief global strategist and head of emerging markets for Morgan Stanley Investment Management, and author of a New York Times bestseller, The Rise and Fall of Nations. Based in New York, Sharma has been a global investor for more than 20 years, and a writer for even longer. He discusses why global growth rates are lower than expected — and tries to find some semblance of optimism amid the global volatility.
In the first part of this two-part interview, he discussed the roots of the slowdown in global growth, the challenges facing China and held India out as a potential bright spot.
FA: What other areas appeal in terms of their economic and investment potential?
Sharma: In Latin America we like Mexico, which we think has carried out some reforms and the fruits of those will become more clear over time.
Latin America has seen some interesting developments. The former Chilean president [Jose] Pinera told me that ‘in good times Latin America turns to the left, in bad times it turns to the right’. That’s what I think is really going on with Latin America. In country after country you are seeing a rightward shift and back to more business-friendly policies. We are seeing that in Brazil and Argentina, in Venezuela and Peru. The complacency of the last decade is likely to get out of the way.
That’s related to the fact so many of these countries are exposed to commodity price volatility. Most people only reform when they have their back to the wall, and since most countries have their backs to the wall right now, they will reform.
FA: Let’s go back to China. What does the government realistically need to do to improve China’s economic prospects in the future?
Sharma: The single most important thing China must do is avoid this growth target. The main reason China is in the trouble it is today is that it has this unrealistic growth target. It cannot grow any more at this rate of 6.5% given where it is in the economic cycle today.
It’s a political goal, which was based upon the Chinese government’s announcement in 2010 that it wanted to double GDP by 2020. That means they need to grow by 6.5% from now until then to get there. That’s at the heart of the problem today.
People ask me today whether China will carry out serious reform and I answer that they cannot do serious reform until they have a realistic growth target. Because without a realistic target you are being forced to increase debt and capacities in the wrong areas to meet that growth target.
Such a high target isn’t needed anyway. The demographics have shifted and now you have a declining working-age population. That can involve short-term pain, such as what happened during the reforms that [former premier] Zhu Rongji pushed through. But there doesn’t seem enough appetite to experience such pain for now.
FA: But that means the debt is likely to spiral upwards, until eventually it’s not sustainable.
Sharma: That’s the guessing game – when that reset button will be hit.
FA: Yet many people say China’s debt market will be the next big opportunity.
Sharma: Let’s see if they can control it first.
FA: What other economic dynamics are you focused on?
Sharma: In this age of pessimism you need to consider that the global economy won’t grow at the rate it was at in the 1980s, 1990s and especially the last decade. Once you do that you can consider what are the right and wrong things to do next.
The other big thing I’ve been discussing is the role of the Fed. It’s never been so powerful, partly because the dollar has never been so widely used as today. So whenever the Fed goes to tighten interest rates it leads to such a panic attack on the world. Even China today is reliant on the Fed.
The fact we are breathing easier now after a panicky start to the year is because the Fed dialed back on its hawkish stance, which helped to weaken the dollar and push up prices. The dependence of the world on the Fed and the dollar is very important.