Emerging markets gaining ground

Gallagher noted that the most recent period has been far greater in significance than anything we’ve seen in recent years and that government stimulus has had a major impact on global economies. “We feel there have been enough structural changes in place that we are really going to be seeing a future that looks very different from the past.”

Developed world challenges
While the massive stimulus provided by U.S. government has caused a near-term market rebound, Gallagher said the U.S. still has major challenges to overcome.

“If the consumer’s not fixed, it’s pretty hard to believe the overall economy is fixed. And the problem with the consumer is the amount of debt they had.” He estimated that it will take roughly 6 years to see household debt decrease and savings rates increase sufficiently to resolve this dilemma. “You’re looking at a fairly lengthy period—it could be four years, it could be 10 years—of consumers pulling back and, therefore, GDP growth being below trend.”

High levels of government debt are also an issue. Gallagher expressed concerns that developed countries will end up spending most of the wealth generated by GDP on previous borrowings and that the shorter-term maturities of North American debt could become problematic. Looking at the debt held by Canada and the U.S. in particular, he added, “42% of both countries’ debt matures in the next 14 months. That leaves both countries very vulnerable should interest rates begin rising.”

Emerging market opportunities
In contrast, Gallagher believes that emerging markets will assume a greater role on the world stage.

“They now have about 25% of global GDP; they also have 80% of the world’s population, 70% of the world’s foreign exchange reserves and about 50% of the world’s energy consumption,” he said. “I believe that you’re going to see this number trend up…in terms of emerging markets’ importance in the world.”

And this movement could create significant opportunities. For instance, Gallagher noted that there are around half a dozen countries that the World Economic Forum considers to be developed that Morgan Stanley considers to be emerging.

“One of the easiest ways to make money, we think, is to frontline Morgan Stanley…if you’re able to invest in some of these countries before Morgan Stanley has officially blessed them that it’s now safe to go there, you tend to do fairly well.”

Looking ahead, Gallagher said the recent positive market trend will likely continue in the near term, as much of the fiscal stimulus in countries such as the U.S. and China has not yet been spent. “There’s still a lot to come, so what has gotten the economy going is likely to continue for a little while longer.” However, given the large debt obligations that developed countries are carrying relative to undeveloped countries, the balance of power will shift.

“A number of developed economies have taken on a crushing load of debt whereas the emerging world has actually learned a lesson from the mid-90s and has improved their balance sheets dramatically,” he said. “Consumers in those countries are in a much better position to continue spending as well.”

Consequently, he added, the geography of a business will be an important consideration in determining where to invest going forward.

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