2020s:If history is a guide, the next decade will be anything but another American decade
After the turn of the millennium the United States suffered its weakest decade of economic growth in the post-World War II era and served as ground zero of the global financial crisis. Extrapolating from recent events, as they often do, forecasters began predicting a long American decline. Instead, over the course of the 2010s, the US staged a comeback as an economic superpower and, even more, as a financial superpower.
The US economy grew faster than other rich countries and navigated the decade without suffering a single recession, the first time that has happened since records began in the 1850s. Defying the legion of declinists, the US was one of only two major countries, alongside China, to expand its share of the global economy in the 2010s.
With central banks, consumers and investors around the world increasingly eager to hold dollars, the greenback ruled global money flows as never before. The American stock market rose 220% in the 2010s. That was four times the gains in the rest of the world, and in key rivals like China and Germany.
It was nearly seven times the gains in India (up just 35% in dollar terms for the entire decade.) Today seven of the world’s ten largest companies by stock market value are American, up from three in late 2009.
But if history is a guide, the 2020s will be anything but another American decade. Economic trends that define one decade rarely define the next. This cycle has repeated itself throughout the postwar era.
America was the hottest story in the world economy and markets in the 1960s, but it gave way to emerging nations in the 1970s and Japan in the 1980s before rising again in the 1990s. After the turn of the millennium, emerging nations made another strong run, and by 2010 forecasters were predicting that emerging markets would be the story not only of the next decade but of the next century.
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Instead, excluding China, emerging countries as a group saw their share of the global economy decline in the 2010s. India was one of the few smaller exceptions, and saw its share rise by almost a full point to 3.5%. But it did not escape the generally desultory returns for emerging stock markets. With an average annual gain close to zero, this was the worst decade for this asset class since the 1930s.
Why does this cycle play out in such a predictable way, decade after decade? After a good run, national leaders grow complacent and start spending irresponsibly, businesses and consumers run up debts, investors end up overpaying for stocks, and the dominant companies get lethargic and fall back into the pack.
The United States at the dawn of the 2020s is a complacent land with a rising government deficit, spreading corporate debts, and elevated prices not only for the stock of tech giants like Amazon and Alphabet, but also for financial assets of all kinds.
At the same time, many other countries, particularly in the emerging world, were forced by pressing circumstances to spend the last decade reducing deficits and debt, and enacting reforms that should put their economies in position to grow more rapidly. Quietly, global economic forces are shifting in ways that could set the stage for a comeback by smaller nations and businesses in the 2020s.
As the US and China battle to contain each other, their titanic struggle is scaring off trade and investment, which is instead shifting to smaller countries, including Vietnam, Taiwan, Mexico, the Netherlands and Ireland. To prosper amid the economic damage caused by the superpower trade war, nations like Brazil and Japan are signing regional and bilateral trade deals.
The big American tech companies, in contrast, face a global regulatory backlash against their monopolistic power. These giants, and comparable internet services in Southeast Asia, Latin America and other regions have bought out smaller rivals and driven others out of business. But they also enable the rise of many more because their platforms allow millions of entrepreneurs to reach wide audiences, often catering to specific national or regional tastes.
It used to be that big companies competed for limited shelf space in retail stores by winning consumer trust in multi-year, multibillion-dollar TV ad campaigns. Now, internet platforms allow small companies to bypass stores, win public trust instantly through consumer reviews, and build a brand on cheap internet ads, even free YouTube videos.
Globalisation is thus gradually giving way to localisation, which makes this a promising time for countries with domestic markets large enough to support significant expansion in local businesses. That’s especially true of countries where the population is still relatively young and fast-growing, like Indonesia, the Philippines, Egypt and Mexico.
Stock markets worldwide are still dominated by “mega caps,” meaning companies with a market value or “capitalisation” of $200 billion or more. After sliding for a decade, the top ten companies in India saw their share of the stock market rise over the course of the 2010s to nearly 55%. This growing dominance of the top ten has been typical of many markets this past decade, but increasingly, the giants face challengers bubbling up from lower in the ranks.
In finance, the fastest growing companies are in “fintech,” including digital payment apps and the small banks that support them. In insurance, the hottest firms are also mobile internet services, or “insuretech,” and they are also disrupting the big, established players.
According to the Nielsen company, the fastest growing American food and beverage manufacturers are the smallest ones. Search “ketchup,” an American staple once virtually synonymous with a single brand, and you will find more than 680 results including local purveyors selling flavours such as bacon.
Apps that provide restaurant search and reviews, such as Zomato in India, are giving instant credibility and market access to start-up chefs. Others are providing seatless “ghost restaurants” with a kitchen to make meals for delivery only, a low-cost way for solo entrepreneurs to compete head to head with global fast food chains.
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Many internet platforms also provide cloud computing, which allows entrepreneurs to build back office operations like customer relations and bill collection much more quickly and cheaply. Barriers to entry are falling, particularly since many of the hottest internet companies own few physical assets.
Uber, the world’s largest taxi company, owns no taxis. Airbnb, the largest home rental company, owns no homes. But that means future rivals won’t have to invest heavily in tangible things, either.
At the same time, the rise of populist nationalism is injecting patriotic fervour into “buy local” movements. In an October survey, Chinese consumers cited “national loyalty” as the main reason they would “rethink US brands.” On India’s Independence Day, an ad for the Patanjali food company actually urged customers to “perform your patriotic duties” and “boycott products made in China, USA, UK & Europe.”
The decentralising forces unleashed by nationalism, localisation, internet platforms and cloud computing all conspire to unseat the global giants, which for the moment are mainly American. The US market accounts for well over half of the global value of stock markets and has never been more expensive relative to other national markets.
But remember, churn is the norm. Among the world’s ten largest companies today, only one (Microsoft) was on the top ten list in December 2009. The likelihood that any company will survive in the global top ten for a second decade in a row is just 17%.
If the usual pattern holds, it’s likely that America is peaking and smaller (not necessarily small) economies will make a comeback. They will emerge from Poland to Vietnam and, if it pushes harder on reform, possibly India as well. If the 2010s were a golden age for the world’s largest economy and its mega corporations, the 2020s are likely to be remembered as the decade when smaller was beautiful again.
Source: The Times of India | Written by Ruchir Sharma
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