Ruchir Sharma: Time To Distinguish Between EM Countries (Audio)

about the impact of lackluster global growth. The SMP five hundred index Little change now down less than point one percent, falling two points to seventeen, and has stackdown twelve a drop of two tents of one percent down. Industrial is now down three points. Little change there at eighteen thousand

one ten. You up seven thirty seconds, the yield one point six seven percent, Gold up ten fifty ounce to twelve seventy two, a gain of eight tenths of one percent, and crude oil down or one point three percent fifty dollars fifty nine cents. I'm Charlie Pellett, and that's a Bloomberg Business Flash. Charlie Pellett, thank you so very much.

Now it is time for the e t F report, and it's brought to you by Vanack Vectors e t F expect more from your muni's target tax exempt income by maturity and credit quality, all with low cost e t F s. Visit at neck dot com slash Muni Vanek access the opportunities for report. Today on the e t F S, we turned to Catherine Connery. Investors are awaiting a potential market moving event in the coming week.

It's something that people should be aware of because it's a big variable investing in emerging markets in China right now, and it's not something you would think about because has nothing to do with macro, you know, situations, or the FED or anything. Bloomberg Intelligence analist Eric valtunis, so what is this event? MSCI will unveil the results of its annual review. Assets worth ten and a half trillion dollars

or benchmark to MSCIS indexes. About thirty six point nine billion are tied to emerging market e t s and four five million in is an e t S attract frontier markets. Valtuna says their speculation about whether m s c I will include China's mainland stocks or a shares if they say that A shares from China will start to be included. China will go from say an eighteen percent waiting, which it is now, and they'll add maybe one or two percent at first, so it'll go up,

but over ten years it'll go it'll double. That's how big the A share market is. We're talking about a five six trillion dollar market. And that's your Bloomberg ETF report. I'm Katherine Cowdery. You're listening to Taking Stock with Vim Box and Kathleen Hayes on Bloomberg Radio. In December tw our next guest was on the road in India. He was interviewing locals in connection with the upcoming elections. His new book is entitled The Rise and Fall of Nation's

Ten Rules of Change in the Post crisis World. He's the previous author and of Breakout Nations Who Share. Sharma is the head of Emerging Markets and chief Global Strategies for Morgan Stanley Investment Management. Were thank you very much for joining us. Thanks tell us what you learned by traveling around India and speaking with locals about their lives. Well, Uh, that chapter that they're referring to is called the Price

of Onions. And what it really told me was that how concerned the population there was about inflation, and when the population is really concerned about rising prices, that can be the absolute deathanels for the government in power. So in India, there was a lot of resentment back then about what the government had done with tackling inflation, and a few months later the central government lost the election in the landslide victory that Narina Remodi enjoyed in Mayo.

So therefore, I think that inflation tears you a lot about what's happening in the country, how much is it investing, and what is the political mood like in a country. And so I think that was it sort of solidified

that opinion. Uh, it's such a great time for a book like yours to come out, and of course as your second big book on e t s. And a story this week on Bloomberg mentions that assets of black Rocks flagship e t F from Emerging Market Debt Search to six and a half billion dollars is eclipsing the largest mutual fund in the category ETFs gaining ground. But I think the story here is really the interest that

people have now in emerging markets. I guess it's partly because they can't get so much return in US and other developed countries, and they're we're willing to take a gamble on emerging markets. But the emerging markets have underperformed a lot this decade, and I think that there is a growing view now that maybe the worst is behind us. The valuation of the entire asset class looks very appealing. But of course, as you know that as an active manager, I cannot be endorsing e T s and we have

at least sort of always beat in the benchmark. And I think that the entire issue here, and that's what I speak on about in my book, is that to stop talking about emerging markets as a homogeneous entity. That you know, this is nearly the global economy now and we need to distinguish the good, the average, and the ugly within that very large space. And so that's what I try and do that try and sort of see what are the ten most important things to look at

to try and distinguish between different countries. And we have seen that this decade that you have countries like Philippines which have done very well. On the other hand, the countries like Brazil have been an absolute economic disaster, and I think that that's what we have to do here, which is to sort of spot the winners and separate them from the losers. And that's the game that you

always have some winners and losers. In such a large space, we see the good the bad, and I'm not going to win include the ugly because i want you to speak about a chapter about good billionaires and bad billionaires and what we can learn. Yeah, you know, like five years ago, I would have not included a chapter on reading income in equality in a country, but it's become such a big global issue now and everywhere I go from Soul to Santiago, income inequality is a very big issue.

The problem is that how do you get a proper read on income in equality? The data that economists look at, like Genie coefficient and other such stuff is very backward looking. And what I'm trying to do here is to figure out that when is it that the popular mood in a country turns against the rich or turns against the wealth creation. And that way I my sort of method that I've developed is to look at the good and

the bad billionaires in the country. What do I mean by that, which is that when a country is producing wealth in the so called good industries, which is industries which reward genuine and um entrepreneurial talent, like in manufacturing,

like in technology, that's good billionaires. On the other hand, when you're producing wealth in industries such as um real estate, mining, commodities, often with the help of government connections in that country, or because you inherited a lot of that willth that is perceived as being bad. So what I try and do is to have a look all the time at the ratio of good to bad billionais in a country and what that tells you about countries fate. You know,

so many great chapters. Let's take a look at why democratic capitalism beats the Chinese brand, because over the past ten years or so, there are a lot of people saying, oh that this the brand of Chinese capitalism works best for them and probably better than US style capitalism would. And of course now we see the China economy slowing. We see George Soros of the past, you know, four or five six months uttering words here and there about a debt bomb that's about ready to go off in China.

Very very cautious there. What do you see? Yeah, I think that as far as China is concerned, UH, its leadership. UH. You know what, there's a lot of right for the country till about two thousand and eight or so, and then that same authority in leadership, which could take very quick decisions, began this huge stimulus program in UH at the depths of the crisis, and there's still paying a price for it. So my point here is the fact that authority in governments can make quick decisions, but they

either get it very right or very wrong. And when they get it very wrong, there are no checks and balances to put them on the right course. And also for every success story like China, I can point out to you many authority in regimes in Africa and Latin America who got it totally wrong. So it really depends on the quality of the leadership. And in China's case, UH.

I think what's happened is this that till about two thousand and eight they were moving towards a more market oriented economy and also that dead levels were quite stable. But since then they've gone into reverse gear, which is that the state has become more interventionist and that debt levels have expluded. Here's one statistic which tells you as to why you should be worried about China. Um, it takes now six dollars of debt to create a dollar

of GDP growth in China. At the peak of the U S housing bubble in two thousand and eight, it took three dollars of debt to create a dollar of GDP growth in uh the US. So that's how out of balanced China has become today and how rapidly debt is growing to sustain an increasingly slower economy. First years speak about the United States if you can. You talk about deep trade links, strong manufacturing and technology, as well as good billionaires such as Bill Gates, but you also

have a debit side. Yeah, I think that. You know, like, in no country in the world today, are we going to be able to find a country that hits all my ten rules and sort of checks all the boxes. I think that's so to put that in perspective or it's very easy to get pessimistic about a country because it's very easy to find fault with a country because no economy is growing at the pace that it was growing last decade, from China to India to Brazil to

the United States. But we have to keep in perspective that you have to compare countries on a relative basis, and in that regard, I think where the United States is still doing relatively better than many developed countries because it's demographics are better, it's working. Each population is at least still growing compared to many other countries where it is shrinking, including in China. Now it's dead level has

stabilized after growing very rapidly last decade. And I also feel that on some of the UH metrics, such as the good billionaires, the United States still does better than many other countries. That's why in very few other countries would a billionaire be able to make a run for a president, as is the case here, because in Russia

to Mexico billionaires are so hated in those countries. That is a taste of what you're going to get when you read a very interesting new book, The Rise and Fall of Nations, Forces of Change in the Post Crisis World by Rouchier Charmer, Rochier says, you can't talk about emerging markets anymore. You have to go country by country. This is taking stock on Bloomberg Radio