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[William Pesek] Goldman’s picks can’t beat ‘7% Club’ on sexiness

Feb. 18, 2011 - 19:03 By 류근하
Is anyone else a bit BRIC-ed out?

Hey, I completely get the importance of Brazil, Russia, India and China as emerging powers, growth engines and, perhaps, role models. Yet ever since Goldman Sachs Group Inc. squeezed the indispensable four into an acronym, we seem to have lost sight of a wider constellation of hugely promising economies.

Even Jim O’Neill, coiner of Goldman’s now-ubiquitous BRICs, says investors ought to concentrate on a broader basket of “growth economies” as Brazilian, Russian, Indian and Chinese stocks gyrate. It really is time to dispense with this BRICs hype and focus on a more useful yardstick: the “7 Percent Club.”

This concept comes courtesy of Standard Chartered Plc. It’s a fluid list of economies that achieve that rate of growth consistently over an extended period ― and, of course, it includes China and India. More importantly, the nature of the grouping has the power to exert a much-needed peer-pressure dynamic in Asia, the world’s fastest-growth region.

It’s an incentive for countries like Bangladesh, Cambodia, Indonesia, Mongolia and Vietnam on the cusp of membership to try harder. It’s also a reminder to investors that focusing only on the biggest, sexiest emerging powers isn’t always best.

Imagine for a moment a utopia in which theoretically any economy, regardless of population and mix of natural resources can join the 7 percent crowd. All John Calverley, Standard Chartered’s global head of macroeconomic research, has done is create a simple criteria for entry. Club members can enter and leave depending on their macroeconomic performance.

Sure there are caveats here. One is the Cult of GDP. In Asia, GDP stands less for gross domestic product than gross domestic problem. Leaders work to mask challenges with big headline growth rates. They are just as much about advertising as they are a diversion. Racy data distract investors from the cracks undermining economies and give politicians room to step before the cameras and say we’re moving forward.

What matters is that growth reaches those who most need it. So it’s not just a matter of growing faster, but the quality of that growth. By focusing on growth alone without democratizing its benefits, governments risk Egypt-like backlashes.

Another is environmental. Were Britain’s Prince Charles to read this argument, he might be tempted to toss his morning tea at the computer screen. In a recent piece in the Times, of London, the prince made an impassioned and logical call for “decoupling economic growth from increased consumption in such a way that both the well-being of nature’s ecology and our own economic needs benefit simultaneously.”

Yet high-income nations tend to do a better job of growing sustainably than poorer ones. It’s also more likely that developing nations will be far more enthusiastic about boosting growth than reducing carbon emissions. So, for better or worse, this issue of growing faster is what it is.

The argument is a simple one. Economies growing 7 percent annually double in size every decade and more than quadruple in a generation. After three decades of growing at such rates, an economy can be twice as large as one achieving 5 percent. Calverley points to the experience of China, Hong Kong, Indonesia, Japan, Malaysia, Singapore, South Korea and Thailand over the last half century.

Investors are learning to differentiate between Asian economies doing the right things and those walking in place. Indonesia and the Philippines are as good an example as any. Long-term investment is pouring into Indonesia as the government tries to improve infrastructure, reduce corruption and narrow the rich-poor divide.

Markets are less enamored of the Philippines. There remains a perception of timidity in Manila at a time when policy makers need to reform an economic system that’s been neglected for decades. Also, the nation’s key export has become its people. Remittances account for more than 10 percent of the Philippine economy. Not a good sign.

The Philippines, by the way, is actually growing faster than Indonesia ― 7.1 percent year-over-year and 6.9 percent, respectively. And yet Indonesia gets the headlines and the kudos. The reason: It’s widely perceived to offer greater potential than the Philippines.

That gets us back to Goldman’s BRICs. Russia’s GDP is more than double Indonesia’s and yet it’s often seen as a less promising business opportunity. Russia is a proud BRIC member; Indonesia is left wondering what gives. Some offer a similar argument about Brazil. While it has performed masterfully over the last decade, are the structural changes needed to bring Brazil to the next level feasible? Only time will tell.

All this leaves the specter of upstarts out-BRIC-ing the BRICs.

Chatter about adding another “I” for Indonesia (BRIICs, anyone?) or a “K” for Korea (BRICKs) or a “T” for Turkey (BRICTs) is good sport. It just doesn’t get us closer to knowing where to invest and in which sectors.

It’s time to think bigger. Let’s toss aside alphabet-soup groupings parading as insights and missing the bigger picture about emerging markets. The 7 Percent Club may be a good place to start.

By William Pesek

William Pesek is a Bloomberg News columnist. The opinions expressed are his own. ― Ed.