A recent Bloomberg article titled “The Global Growth Hotspots of the Future Are Here” discussed an HSBC report which advises that investors need to focus on the growth of cities in the Emerging Markets. (1)
“While wealthier countries are more urbanized today, the proportion of urban to rural dwellers in emerging markets is expected to climb to 63 percent in 2050 from 50 percent now, according to the study, which draws on research by McKinsey and the United Nations.
Developing nations’ emissions are rising fast and the report predicted that their share of cumulative emissions would reach 51 percent by 2020. (2)
By 2050 some 5 billion people – more than half the world’s population – will live in emerging market cities, and account for more than half of global gross domestic product growth.
That means policy makers will have to balance the upsides of urbanization – economies of scale, better productivity and infrastructure, chance encounters that lead to new ideas, better productivity and infrastructure – with the potential downsides, in the shape of increased crime, pollution and perpetually snarled traffic. If that doesn’t happen, these ill effects could sap economic potential”, HSBC economist James Pomeroy says.
Cities like Dhaka, Karachi and Lagos will be among the world’s 10 most populous cities, according to the study. By 2030, 81 of the world’s 100 most populous cities will be in emerging markets.
While the article cites the growth excitement and upside of Emerging Market investing, i.e. Infrastructure build out, rising wages, developing markets and supply chain feeder businesses, the article ignores completely the elephant in the room… Climate Change risk…
In a 2017 study in Nature magazine, scientists looked at the effect of rising global temperatures and their effect upon the ability of various populations to be productive economically. What they found is as temperatures rise, human productivity decreases. As productivity decreases, GDP falls. (3)
This study concluded that it is their expectation that the GDP of Emerging Market countries is expected to fall by 75% by 2100. Because Emerging Market countries tend to be equatorial and in higher temperature zones, the impact is greater than the impact is expected to be on the United States and Europe.
A recent study corroborates the view that industrialized countries are relatively less affected by climate change because their economies are less exposed to weather and their capacities to adapt to change are greater. This study does not address negative feedback loops which can lead to accelerating temperature increases. The model described is highly variable dependent upon the variables and numbers used. (4)
Rising temperatures will continue to affect global food supplies, water availability, and social stability, especially in the Emerging Markets. The terrible situation in Syria was driven to a large degree by the drought in 2012 and the effect it had on the social fabric. Anyone who discounts the impact of climate on economic and societal viability going forward is only looking at part of the economic and financial puzzle.
The week of May 11th,2019 temperatures in the arctic reached 84 degrees. Normal temperatures for the affected area at this time of year is 54 degrees. (5)
A 2018 study by the Richmond Fed found, “Overall, these findings suggest that rising temperatures in the future could hamper economic growth in a variety of industries even in developed nations such as the United States.” (6)
We need to examine our economic expectations and adjust accordingly.
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Investing in foreign securities may involve heightened risk including currency fluctuations, less liquid trading markets, greater price volatility, political and economic instability, less publicly available information, and changes in tax or currency laws. Such risks are enhanced in emerging markets.
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