A century ago, Oswald Spengler’s prognosticatory treatise, “The Decline of the West,” declared that what we now call the developed world was dwindling in power, with other, rising cultures destined to supplant it. The two-volume work, published in 1918 and 1922, has been derided for decades, as his prophecies did not materialize. But events may yet vindicate the German scholar, at least in terms of the stock market.
That is the projection of Goldman Sachs, which issued a study projecting that, by 2035, emerging markets’ equity valuations will overtake those of the U.S., which currently has 42% of stock capitalization, compared with 27% for the EMs. Come 2035, EMs and the U.S. will both have 35%, but the EMs will have a smidgen more. By 2050, the developing world, will command 47% of world market cap to the U.S.’s 27%, per Goldman. By 2075, EM stocks will reach 55%, and the U.S. will fall to 22%.
Such a sea change is related to the pell-mell gross domestic product growth expected from most EMs, as compared with the prospects for the U.S., today’s dominant economy. The U.S. currently has a GDP of slightly less than $21 trillion. In GDP terms, it is followed by China ($13.4 trillion), Japan ($5 trillion) and Germany ($4 trillion).
Goldman economists Kevin Daly and Tadas Gedminas, lead authors on the study, wrote that by 2050, China will be the top economy, with the U.S., India, Indonesia and Germany behind it. By 2075, the economists expect India to edge past the U.S. slightly in GDP, resulting in an economic ranking of China, India and the U.S.
But there’s a twist. Even with China as the No. 1 economy, Goldman does not expect its GDP and market cap to remain robust. In fact, according to Daly and Gedminas, China, with an aging population, will see its economic growth decelerate—while India and the U.S. will both gain in population (presumably the U.S. gain will come via immigration).
What’s more, the U.S. will retain the crown for having the biggest stock valuation of any single nation, at 22% by 2075, no doubt a testament to the staying power of its ever-vibrant capital markets, in Goldman’s view.
The upshot is that China will see its equity valuation reverse course. How much? Goldman anticipates that China’s stock market share will rise from 10% to about 15% by 2050, “but amid a demographic-led slowdown in potential growth, it’s expected to then decline to around 13% by 2075.”
Aside from younger and fast-growing populations, India and other EMs (note that China is technically a developing nation) have significant investor potential because many of their companies are privately held and eventually will go public, Goldman argued.
“Of course, it’s no sure thing that capital markets in emerging countries will develop so successfully,” the firm’s report warned, and they could fall victim to various ‘isms.’ Populism, increased nationalism and tighter protectionism could hobble the EMs, the report projected.
Recall that, in the 1980s, Japan was the rising power on a path to dominate the world, in keeping with the Spengler thesis. No one, certainly not the Goldman economists, believes that now, in light of Japan’s stodgy growth over the past three decades.
Given that, the expected decline of the U.S. as an economic and stock market dynamo in the future may not happen, which would keep Spengler’s legacy stuck in the mud.