Summary of Key Points
Recently, the author launched the “BRICS+ Thinking” project to explore global approaches to addressing common challenges. Gavin Davies, who once worked with the author at Goldman Sachs, used data to review the economic changes that occurred 25 years after the concept of the BRIC countries was proposed: China and India have outperformed expectations significantly, making up for the weaker growth of Brazil, Russia, and South Africa; even developed economies like the United States have not met their initial forecasts. The center of global GDP has continued to shift eastward, but the valuation of stock markets remains firmly in the United States, creating concerns about whether the U.S. stock market is overvalued and whether it will need to adjust in the future. Davies also drew parallels with the stock market bubble in Japan during the 1990s.
Detailed Analysis
1. BRICS 25 Years Later: China and India Outperform, While Brazil, Russia, South Africa, and the U.S. Fall Behind
When the term “BRIC” (Brazil, Russia, India, China) was first coined 25 years ago, there were hopes that these emerging countries would drive global growth. The reality is as follows:
- China and India Outperformed Expectations: Both countries have grown faster than predicted and contributed the most to overall BRICS growth, compensating for the weaker performance of Brazil, Russia, and South Africa. More importantly, their per capita GDP has also exceeded expectations, which directly affects the living standards of ordinary people, meaning they have more money in their pockets compared to what was anticipated. This sets a positive example for other developing countries.
- Brazil, Russia, and South Africa Fall Behind: These three countries have not met their growth targets, possibly due to issues such as resource dependence, political instability, and economic structural problems, failing to keep up with the pace.
- The U.S. Also Fails to Meet Expectations: Despite current positive rhetoric about the U.S. economy, Davies notes that its performance has not lived up to the predictions from 25 years ago; it is only slightly better than Europe and Japan, which does not constitute “outstanding” performance.
2. The Global Economic Center of Gravity Is Moving Eastward
Davies created a visual map showing that the center of global GDP is currently located west of Pakistan and predicts that by 2040, it will move to China’s border. This trend has been ongoing since the 1980s, with the Western economy once dominating, but now the Eastern economies (especially China and India) are gaining increasing significance, similar to a balance shifting gradually towards the east.
3. Stock Markets and the Economy: Two Different Realities
There is a clear disconnect between economic performance (GDP) and stock market valuations:
- The U.S. Stock Market Is Overvalued: The total market value of the U.S. stock market accounts for about half of the global total, but its GDP only constitutes 25% of the global economy—this means the “economic foundation” is only 25 layers high, while the stock market has reached a height of 50 layers.
- China and India’s Stock Markets Are Undervalued: China’s stock market accounts for 10% of the global total, India for 5%, and the BRICS as a whole for 20% (which is higher than the initial predictions of 10%, but still not enough). However, China’s GDP accounts for a much larger proportion of the global economy compared to its stock market weight—indicating a solid economic foundation but a relatively low stock market valuation.
4. Will the U.S. Stock Market Repeat Japan’s 1990s Mistake?
In the 1990s, the Japanese stock market reached a peak, accounting for 45% of the global market value, only to decline by 36% over the following years, leaving it at just 5%-6% today. The current 50% share of the U.S. stock market in the global total is similar to Japan’s situation, which is a warning sign:
- Two Possibilities: Either AI will truly enable the U.S. economy to accelerate growth (as optimists suggest), thereby “strengthening” the overvalued stock market, or the market will need to adjust (i.e., decline).
- Policy Risks: If people realize that stock market returns far exceed actual economic growth, they may demand policy intervention (such as higher taxes on stock market profits or increased regulation), which could affect the market.
In summary, the U.S. stock market is in a similar position to Japan’s in the 1990s: it either needs to find a way to adjust its valuation to reflect the actual economic reality or wait for the underlying foundation to strengthen. However, it is uncertain whether the economic foundation will indeed grow strong enough.
This analysis highlights that the global economic landscape has changed, but traditional stock market perceptions have not kept up. The high valuations in the U.S. stock market particularly carry potential risks. Investors should be aware of these discrepancies and the resulting volatility in their investments.