by David Larrabee, CFA
In his 2007 book, The Emerging Markets Century, author Antoine van Agtmael, argued that the world's economic center of gravity was decisively tipping toward emerging markets, a term he is said to have coined in 1981 while at the World Bank. Recently, Van Agtmael spoke at the CFA Institute 2013 Asset and Risk Allocation conference, and while he asserted that the shift in competitive edge which he had written about six years earlier remains intact, he sees it slowing because of a series of game changers that will spur an industrial renaissance in the United States.
Make no mistake, Van Agtmael remains bullish on emerging economies. In fact, he sees opportunities beyond the BRICs (Brazil, Russia, India and China), with the MIST countries (Mexico, Indonesia, South Korea, and Turkey) offering particular promise. But what Van Agtmael called the "creative response" from the United States, along with unexpected political, environmental, and national security challenges facing emerging markets, have combined to leave the United States surprisingly well positioned for the decade ahead.
Here are the game changers to watch, according to Van Agtmael:
- "Saudi America." Thanks to the shale energy boom, Van Agtmael sees the United States on the cusp of a natural gas revolution and on the road to energy independence, which he expects as soon as 2020. With energy often a significant cost of production, industry should benefit from the significant price advantage gas currently enjoys. Cheap gas will also be a strong driver of demand. The United States boasts a significant head start in terms of technology and infrastructure, and in Van Agtmael's view, the environmental issues are manageable.
- Erosion of the low-cost advantage. The low-cost advantage that has fueled growth in countries like China and India has been shrinking. While costs in China and India have been rising 15%–20% per year over the past decade, those in the United States have essentially remained flat. Skilled labor shortages in emerging markets and U.S. worker productivity gains have helped to turn the tide. On a recent trip to Asia, Van Agtmael heard companies across the continent complaining about American competition. As a result, China is no longer the default option for a new plant, and the United States is being seen as a viable option.
- From manufacturing to "brainfacturing." Not only is the labor cost gap between United States and emerging markets declining, but innovation and automation are prompting a move from manufacturing to what Van Agtmael calls brainfacturing. Robotics has made U.S. factories more productive, versatile, and competitive, reducing the pricing power of commodity producers like China. And relatively new technological advances, including sensors, 3-D printing, nanotechnology, and the mapping of the human genome, are areas in which the United States holds a competitive edge.
- Smarter competition. US firms like Amazon (AMZN), Apple (AAPL), Facebook (FB), Google (GOOG), and Twitter are dominant US brands that have been rewarded for being innovators. And, according to Van Agtmael, since the financial crisis of 2008, US companies have adapted better than most by focusing on higher value niches and employing smarter pricing strategies. What has taken Van Agtmael by surprise is the pace of this response by US firms — presumably an advantage he thinks they can maintain.
Van Agtmael closed by suggesting that the discussion has shifted to "reshoring and in-sourcing," and that the United States is "back in business." It's a bullish call that bears watching.
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