It's the extraordinary growth potential, but there's a long story and there's a short story. The long-term narrative is about a massive structural shift that has happened in the last 10−20 years. In the early '90s, emerging market equities were considered somewhat like frontier markets are today. There was the potential for exceptional absolute returns and low correlation to everything else in a global investor's portfolio. Now, they have become mainstream. There are two drivers. First, the majority of global economic growth will come from the developing world, which represents 90 percent of the world's population. Second, the developing world is more economically resilient. We no longer see the repeated banking, balance-of-payment, and currency crises of the 1980s and '90s, and governance has changed dramatically. Populations are also much better educated, they have access to information because of technology, and they no longer follow political pretenses and biases—they are demanding economic deliverables. The one caveat here is that the world has become integrated—emerging and developed markets trade in sync, and the low correlations are behind us.
The short-term story is playing out in the headlines, and it has to do with two cyclical concerns. The first is about the cost of capital and global liquidity. There is a lot of anxiety about the Fed's tightening and impact it will have on emerging markets. My view is, please, please bring it on—and the sooner the better. Get it done because, by and large, after some brief turbulence, these markets will walk straight through it and will be better off on the other side. The second has to do with growth rates of the more prominent emerging markets. China's GDP growth has slowed to about 7 percent, more sustainable from the double digits a few years ago, and it will probably get closer to 5 or 6 percent in the next five years. This has had a huge reverberation in terms of commodity prices and commodity economies, like Russia, South Africa, and Brazil, which have taken a short-term hit. The composition of China's growth is also changing, moving away from infrastructure and real estate towards more sustainable areas like domestic consumption. The other factor is that over the last three years, we have seen the worst global export trading environment in the post-war period. Many emerging market companies are on the frontier of productivity in their individual countries and are globally competitive. But we're in the advanced stages of these cyclical headwinds, and I expect to see a meaningful shift in 12 months. This will be driven by improved employment, consumer demand, and industrial investment in the U.S., which will have a pronounced impact on major manufacturing centers in the developing world. Japan's efforts to build a more sustainable growth environment will help, as will the corporate restructuring and quantitative easing in Western Europe.