For the best opportunities, look outside the U.S. and China, says Ruchir Sharma, the chairman of Rockefeller International, in an interview with Barron’s. Sharma will soon be launching a new investment firm in partnership with Rockefeller called Breakout Capital, which will focus on emerging markets and global asset allocation.
When asked how the Ukraine war will affect the markets, Sharma said he was not worried as many others are that China will join with Russia, pointing to China’s deep entrenchment in the Western financial machine. He’s also unsure whether current leader Xi Jinping could get a third term, given how unprecedented that would be in Chinese history, but said he was more focused on China’s economy, which could weaken further under the weight of its debt. In fact, China is the emerging market that Sharma is least excited about, telling Barron’s that as the country’s population shrinks, so will its potential for growth.
Sharma believes we will soon see a slowdown in globalization, as countries begin to keep their data to themselves, but that more bilateral and regional agreements could take place, such as in India, where the UAE has become an important trading partner. The Ukraine war marked a significant change in the global economy, Sharma says; even if we don’t see it yet in margins and earnings, we will eventually. But with global profit margins under this kind of pressure, Sharma told Barron’s that “the silver lining [is that] inequality maybe starts to [improve]” as labor gains more power in the next 5 to 10 years.
In stocks, Sharma posited that some global luxury stocks might be close to their peak while mass-consumer companies in the mid- to low-end range could do very well as that group gains bargaining and wage power. While he doesn’t think China is completely out of the game at the moment, he told Barron’s that investors have too much allocation to both China and the U.S., and highlighted the statistics: “The U.S. is 62% of the global market cap, and the economy is just 26% of the global economy. Emerging markets’ market cap is 11%, while its economic size is about 35%.”
The emerging markets that Sharma likes best at the moment are India and Indonesia, where he highlighted Astra International and Bank Central Asia. He also mentioned Brazil and its companies Petrobras and Vale, as well as Latin America, which is doing better as commodities prices rise. Indeed, Sharma said, diversifying away from China into some of these markets will strengthen them. And given the massive discounts that many quality companies in emerging markets offer compared to developed markets, there is an abundance of opportunity “outside of big-cap tech,” Sharma says.
Lastly, when asked about the U.S. dollar, Sharma said it “is looking stretched” given that the amount of foreign debt in the U.S. is about $16 trillion, or around 70% of the GDP, and that a reserve currency usually lasts about 100 years, which is how long the dollar has been a reserve currency. While there currently isn’t an alternative to the dollar, Sharma told Barron’s that “stuff is beginning to happen.”