Looking beyond the obvious

Are developed markets worth betting on?

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While many of the non-BRIC rapid-growth economies are worth a big, long-term bet, they’re only part of the picture. To create a well-rounded portfolio, investors will need to diversify their bets to include several mature markets, which are making a comeback in certain areas and sectors.

That may seem surprising in view of the current bleak economic outlook for the G7, but it’s important to note that although rapid-growth markets are picking up output share, developed markets are still major drivers of world economic activity.

EY - Advanced economies remain important drivers of world economic activityRespondents said North America and Western Europe remain critical to protecting the bottom line. Although new investment in these regions is still slow to take off, high energy costs and shorter product life cycles are driving global organizations to pursue near-sourcing.

In the next three years, the number of respondents who expect to outsource more operational functions to providers in mature markets will rise to 36% from 22%. In addition, the number that plan to near-source previously outsourced activities will more than double, from 14% to 35%.

“The global economic environment is going to be challenging for some time to come, and issues such as the Eurozone crisis will not be resolved in the short term. Yet the world’s new markets, particularly those in Africa, offer enormous potential.”
- Mark Otty, EMEIA Area Managing Partner, EY

Mature markets offer several pockets of promise. Innovation and exchange of technology and ideas give these markets an edge over their rapid-growth counterparts. Advanced economies that can leverage these capabilities are at an advantage.

The diffusion of broadband, social, digital and mobile technologies is much higher in mature markets. They can use this to their advantage and retain a high share in the export of goods and services, maintaining their dominant position in certain markets.

Our Index data reveals a correlation between a strong integration score on technology and ideas and a superior share of world goods exports, suggesting that countries in this group are able to leverage their technological strengths to dominate export markets.

The UK, for example, is regaining its competitiveness, ranking eighth in the World Economic Forum’s Global Competitiveness Report 2012-2013. The UK continues to have a sophisticated and innovative business environment.

The US may be a surprisingly attractive investment destination as it offers the:

  • Strong revival of domestic manufacturing
  • Landmark discovery of new shale gas reserves
  • Increasing high-tech and export-fueled growth
  • Narrowing labor cost differentials

The country perhaps best exemplifies the resurgence of domestic manufacturing, which could revive some industries and spark new ones.

A 2011 study by the business-consulting firm AlixPartners estimates that 10% to 30% of the manufactured goods that the US now imports from China could shift back to US production by 2020, adding between US$20 billion and US$55 billion to GDP on an annual basis.

In 2012, GE re-shored its domestic appliance manufacturing business to the US from Mexico.

“We brought back the manufacture of refrigeration units from Mexico to the US for one very simple reason,” says Nani Beccalli-Falco, President and CEO of GE International. “It takes eight hours to make a refrigerator in Mexico; it takes two hours to make a refrigerator in Louisville.”

Colm Reilly of UKTI identifies two phenomena underlying the recent trend toward in-sourcing. “First, technology continues to drive change,” he says. “So companies find that if they take into consideration new manufacturing technologies and the total cost of logistics, including management time and the overhead of managing a location on the other side of the world, they’re able to manufacture at a lower cost than the outsourcers can in some cases.

"The second reason is that the outsourcing of manufacturing has meant that companies have lost an inherent capability that they want to get back.”

 


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