The Bay of Bengal by Sourajit Aiyer

Author:Sourajit Aiyer
Language: eng
Format: epub
Publisher: International Specialized Book Services
Published: 2018-08-17T16:00:00+00:00

Which sectors grow in prominence as a market matures

Bloomberg data of the sector-wise profits of the largest 200 listed companies by 2016 market capitalisation across major developing markets shows that certain sectors invariably grow in prominence as economies mature, and these sectors provide a rationale for investors. The data of the developed markets like the USA, UK, Japan, Canada and Germany is taken as a proxy for matured markets. After all, if something has not worked in the experience of the developed economies whose sector strengths should ideally have matured through their journey, then it probably would not work for developing economies either.

The profits of their largest 200 listed companies showed an uncanny tilt towards the consumer and industrial sectors, along with the financial sector. These three sectors comprised about three-fourths of Germany’s 2016 profits. It was a similar number in Canada. In the UK, USA and Japan, this number was closer to 60%. The average for all the five together was nearer the two-thirds mark. Moreover, the proportions of these three top sectors have grown in all the five developed markets, between 2012 and 2016. This shows that concentration towards consumer and industrial sectors becomes inevitable beyond a point, as an economy matures. It hints that the trend is more structural than transitory.

But why would these few sectors emerge common across most of the matured markets? It cannot be a simple coincidence. This trend is possibly in line with the scaling up of discretionary consumer spending in countries as the disposable income of its people rises, along with scaling up and modernisation of their manufacturing sector to produce those consumer goods. These changes in the structure as an economy matures create the tendency for consumer driven businesses and the industrial infrastructure to flourish. Countries like Japan and Germany were strong exporters of industrial products, while the USA and UK were strong consumers.

Apart from identifying consumer, industrial and financial as the three sectors that rise in prominence in a market’s profit pool as that economy matures, the other observation was the two-third mark – the typical threshold level its largest three sectors should ideally comprise.

Turning to the developing economies, every country has had their competitive advantage, which could be inherent or acquired. For instance, a nation like Qatar or Saudi Arabia had an inherent competitive advantage because they are located right on top of one of the world’s largest known reserves of oil and gas. If geography ever offered pure luck, this is it. Nations in South Asia or East Asia, which did not have the luck of being located above major oil and gas reserves, had to work hard to build and acquire their areas of competitive advantage from scratch. Thus, the technology sector came up in India, textile in Bangladesh, cement in Pakistan and electronics manufacturing in the East Asian nations, etc. Malaysia is another example of an acquired competitive advantage, this time in the agro-sector. It is a global leader in palm oil production. Over the last century, the British colonizers of Malaysia saw the local climate was suited for palm growing.

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