A quick pop quiz:
Which of the following countries is the lowest cost manufacturer in Western Europe?
- United Kingdom
If most of you answered Spain and some of you Germany, then its time to take a harder look at the global competiveness landscape. The correct answer is the United Kingdom. Most of us have outdated views of which countries are low cost and which ones are high cost. Often the easiest way to sort this in our head is to classify emerging market countries as cheap and competitive and the developed world as prohibitively expensive for manufacturing. But a new study on global competitiveness challenges these simplistic assumptions.
The big shift
With the world focused on big-ticket issues like the Crimean crisis and impending tapering by the Federal Reserve, valuable nuggets of news tend to slip under the radar. One such nugget was the release of the Boston Consulting Group’s (BCG) Global Manufacturing Cost Competitiveness Index. This new index tracks changes in production cost of 25 exporting countries over the last decade. The index is based on four drivers of manufacturing competiveness that include wages levels, energy costs, productivity growth and currency exchange rates.
The results of the ranking process are fascinating with Mexico emerging as less expensive than China, UK turning up as the least expensive nation for manufacturing in Western Europe and Brazil ranking as one of the most expensive countries for manufacturing activity. The two biggest positive surprises were Mexico and United States, with the latter making big strides thanks to cheap energy costs due to falling natural gas prices, rising productivity and stagnant wages.
So what does it all mean for the Emerging Market Investor?
Several emerging economies covered in The Emerging Markets Handbook including Brazil, Poland, China and Russia have lost competiveness in terms of manufacturing over the last decade. At the same time many emerging markets are no longer cheaper than the US. Identifying the next export powerhouse could mean the difference between outperformance and below average results for emerging market investors.
As we have explored in our book, almost all emerging countries have used manufacturing and exports as the fuel of rapid GDP growth. It could also mean identifying companies in developed nations that could benefit tremendously from expanding domestic capacity and exporting to emerging markets. An investor could also shift his/her portfolio allocation from export-focused emerging market companies to companies that benefit more from domestic consumption. There could also be tremendous opportunities in frontier markets that would be happy to see a manufacturing shift from their new high-cost neighbours.
In order to develop a long-term view of emerging market trends, it pays to take a closer look at some of the underlying factors/drivers that determine change in rankings like the one put out by BCG. Often insightful research and interesting trends get drowned out by noisy headlines of the day. It is up to the thoughtful investor to ferret out these insights and profit from them.
By Pran Tiku CFP & Vikram Kondur CFA
Our comments, opinions and analysis are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Markets and economic conditions are subject to rapid change, comments, opinions and analysis are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.