"The Rise of the BRICs and N-11 Consumer",

by Jim O'Neill, chairman of Goldman Sachs Asset Management

The Next Eleven (or N-11) are eleven countries—Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, the Philippines, South Korea, Turkey, and Vietnam—identified by Jim O'Neill, chairman of Goldman Sachs Asset Management, as having a high potential of becoming the world's largest economies in the 21st century along with the BRICs.

Download full report here (pdf).

Summary
 In the post-crisis world economy the power of the US consumer has
become questionable.

 Many fear it will be difficult for the world to cope without this key ingredient,
which has been the quintessential global growth engine over the last
several decades.

 We believe that the BRICs and Next 11 (N-11) countries will be more than able
to compensate for any sluggishness in US consumption going forward.

 While it remains the case that today the US still consumes much more than the
BRICs, the developed world cannot compete with these four countries in terms
of growth and incremental consumption opportunities—today, in the decade
ahead and beyond.

 We expect that the BRICs consumer could become as large as the US
consumer by the end of this decade—both in real and nominal terms.

 If China succeeds in raising its consumption-to-GDP ratio over the next few
years and the US ratio falls to its historical average, the Chinese consumer
alone could challenge the US in the first half of the next decade.

 In terms of incremental changes, the BRICs together could add up to $1 trillion
of additional real consumption on average per year to 2025.

 In nominal terms, the incremental consumption from the BRICs could reach
$1.5-2 trillion per year.

 While the BRICs, and particularly China and India, will undoubtedly dominate,
some N-11 countries such as Indonesia, Mexico and Turkey might also gain
substantial gravity as major consumption stories.

 Dramatic expansion of the middle (and high) income classes in the BRICs and
N-11 will be the main driving force behind the rise in consumption over the next
decade and beyond.

 As people shift through different income bands, various goods and services
become affordable and thus demand for them accelerates.

 We show the implications of these income shifts in consumption patterns for
three sectors: consumer durables (in particular, autos), luxury goods and travel
and tourism (in particular, aviation).

 The next 10-15 years could see the start of the BRICs dominance in the global
markets, in terms of both growth and absolute size.

 China has already become the biggest car market by sales. In 10 years, it could become the world’s largest aviation market, and, in 15 years, it could be the
largest luxury goods market.

 While the opportunities and risks are numerous and highly complex, we believe
the rise of the BRICs and N-11 consumer is one of the most important strategic
stories of our times.

Conclusion
We believe that the growth of the consumer in the BRIC and N-11 countries will be the biggest development in the world economy in this decade and beyond. China in particular will remain the key marginal influence to global consumption and many other aspects of the world economy. The other three BRICs, as well as some of the N-11, especially Korea, Mexico, Turkey and Indonesia, will also continue gaining more weight as major consumption stories globally.

The rise of the BRICs and N-11 consumer over the decades ahead will underpin the most important investment themes in all markets, both directly and indirectly. We have been arguing for some time that to benefit from this changing landscape investment managers should consider gradually giving more weight in their portfolios to the so-called Emerging Markets (EM). In fact, we argue that some of the countries in the traditional EM universe can no longer be called ‘emerging’, given their importance in the global economy—we call them ‘Growth Markets’. All the BRICs and an increasing number of the N-11 already belong in the group. Given their size, these countries have capacity to generate a number of big investment opportunities going forward and thus deserve special attention from investors.

The increasing dominance of Growth Markets is certainly a highly complex process. While we have attempted to find answers to some questions, many remain unanswered. This underlines the crucial importance of monitoring the potential pressures and risks resulting from the rising consumer. We will continue to watch thisarea closely and to contribute more related thoughts and ideas in the future.

Download full report here (pdf).