2016 has started with a lot of volatility, putting pressure on multinational companies’ plans and raising questions regarding the outlook for emerging markets this year. There are, however, a number of bright spots that executives should keep in mind, in addition to what is a long list of risks facing multinationals. Below we discuss the outlook for emerging markets this year and how multinationals should be approaching key areas of opportunity and risk as they revisit plans made in late 2015.
What can we expect from China’s slowdown in 2016? Are we going to see a hard landing?
Probably not, although we estimate that the risk of a property market crisis causing a Chinese financial crash next year is as high as 25 percent. In the meantime, businesses need to go after new customer segments and new cities; and they need to adapt their channel and sales strategies accordingly for slower growth.
Watch this CNBC video where I discuss this topic further- Fears about China persist into 2016
Will India deliver on its growth promise?
Yes, we forecast India to grow 7.75 percent annually over the next four to five years. It will be the fastest-growing major emerging market in the next five to ten years. But multinationals need a state-by-state strategy for India. With federalism and decentralization, some states are going to be much more business-friendly and easier to operate in, and multinationals should prioritize the right ones for investment.
Relevant report for FSG clients- India 2020: Outlook and Scenarios
Sanctions on Iran are going to be lifted at some point in 2016. Is this the one market multinationals can’t afford not to be in?
Sanctions are most likely to be lifted after the IAEA confirms that Iran is complying with the terms of the nuclear deal, most likely in Q1 2016. Within the next quarter some Western banks, mostly tier-two and tier-three, are likely to start coming back into the market, and multinationals will follow. However, the Iranian economy is struggling with the damage done by sanctions and low oil prices, so companies should not expect an immediate boom. US companies in particular will struggle with EU competitors who will see a faster and more comprehensive lifting of sanctions, giving them a first-mover advantage.
Relevant report for FSG clients- Iran: What’s next for business?
Brazil and Russia are two BRICs that are both in recession and facing somewhat similar issues. Which one do you think will be faster to recover?
Both are going to see recessions in 2016, with slow recoveries in 2017. Despite the geopolitics, there are actually quite a lot of similarities between the structural issues Brazil and Russia are facing. Both countries are likely to grow slowly for the next three to four years, which requires a change in multinationals’ strategy toward less aggressive top and bottom line growth, and more investment in local manufacturing and channel efficiency. For example, if you are a consumer goods firm and you don’t already produce locally, you would need to be thinking about it very seriously, otherwise your competitiveness will be undermined by currency depreciation and reduced demand. Only the companies that adapt their product ranges and business models to slower growth will be in a position to get sustainable performance from these markets.
Relevant report for FSG clients- Quarterly Market Review: Russia – Q4 2015
Sub-Saharan Africa was the growth star in emerging markets until not so long ago, but its light seems to have faded lately with the slowdown in Chinese growth and drop in commodity prices. Is this going to continue in 2016?
Sub-Saharan Africa is going to remain the second-fastest region in the world after developing Asia during 2016, but the overall rate of growth will be half of what it used to be a few years ago, like in a lot of other emerging markets. Multinationals need to adapt to this environment and pick the markets that can provide resilient growth, rather than just whoever has the fastest growth.
We’ve developed an SSA resilience to external shocks index to help with that analysis and its results show companies should be re-thinking some of their investment priorities in Sub-Saharan Africa. For example, for the past several years, companies have been focusing on some markets like Angola that were growing fast on the back of a commodity boom. Angola is now going to be eclipsed by Kenya, which is only the fourth largest economy in Sub-Saharan Africa but is diversified and is a leader in the East African Economic Community, providing multinationals with economies of scale and a more sustainable growth story.
Relevant report for FSG clients- SSA’s Resilience to External Shocks Index
Mexico has remained quite resilient despite the drop in commodity prices. Is this going to continue in 2016 or are we expecting cooling growth?
Mexico has benefited well from the US recovery and we think this will help the economy weather the worst of the commodity price collapse. The growth is solid, if not spectacular, and that’s going to push multinationals to optimize their distribution and pursue new sales avenues to hit very ambitious growth targets in 2016.
Relevant report for FSG clients- Quarterly Market Review: Mexico – Q4 2015
The Middle East seems to be getting ever more unstable. What are the safe havens in the region companies should prioritize?
It’s about a portfolio approach, not looking for safe havens. Companies need to diversify their risk and that means investing in more reliable opportunities like Saudi and GCC, but also in ones that have a higher risk-reward ratio like Iran, Egypt, Algeria, and maybe even Iraq.
Relevant report for FSG clients- MENA 2020: Outlook and Scenarios
Which emerging markets do you think multinationals should watch carefully that are under-the-radar right now?
In Central Europe these include Poland, Czech, Hungary; Ethiopia and Ivory Coast in SSA; Peru and Colombia in LATAM; and in Asia – markets like Indonesia. The wealth of a country like Kenya or Morocco is matched by individual provinces in both Java and Sumatra.