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Arif Naqvi Headshot

Investing in a Reshaping World

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World leaders are convening at Davos this year to discuss the forces reshaping the world around us. Whatever else happens, the 21st century will be remembered for the rise of markets across Asia, Africa, Latin America, the Middle East and Turkey. Headlines regarding these markets, which I prefer to call growth markets, have been volatile over the last year but a long-term view paints a very clear picture of continuing growth. Over the last five years, these markets accounted for 80 percent of global growth and for the last fifteen years, GDP in these markets has grown more than three times faster than that of developed economies. Growth markets are just getting started!

For the last decade, the investment world has tended to focus on the BRIC nations, for surely, these countries are large, they have grown rapidly and they have benefited from natural resources, demographic dividends or both. There are legitimate debates about whether these markets will slow down and what additional reforms are needed to sustain growth but that being said, to paraphrase Mark Twain, reports of their death have been greatly exaggerated. After all, even the most conservative estimates still have China and India growing twice or three times as fast as the United States -- let alone the European Union.

However, the more fundamental issue is that the world of growth markets is made up of more than the four BRIC countries. For example, in Latin America, the Pacific Alliance countries (Mexico, Peru, Colombia and Chile) are collectively already the same size as Brazil in GDP terms and they are growing twice as fast. In South East Asia, private consumption per capita is already as high as in China today. Africa has higher GDP per capita and more people in the middle class than India. These ex-BRIC markets are generally driven by similar trends to those propelling the BRIC -- attractive demographics, an expanding middle class and rapid urbanization -- but there are important nuances that investors need to appreciate to best capitalize on these trends.

Take demographics as an example. All growth markets are younger than developed markets, but comparing the demographic pyramids for Africa, the Pacific Alliance, China and Europe is telling: China looks more like Europe than Africa. In other words, some growth markets are on the front end of a dividend, and others are on the tail end. Mexico, for example, has a growing cost advantage over Chinese labor due to demographic patterns.

Similarly, the rise of the middle class in growth economies needs to be understood as several trends in one. Some 1.7 billion people will join the ranks of middle-class consumers in growth markets over the next 15 years. But additionally, people already within the middle class are getting wealthier. This is creating multiple consumer segments -- from the mass-market to luxury products. Abraaj has seen this first-hand with its investments in consumer companies like Fan Milk in West Africa and Acurio Restaurantes in Latin America.

Bear in mind also that the world is adding almost one million city dwellers every five days -- mostly in these growth markets. This matters to investors because cities are the hubs of economic activity. No country has reached middle-income status without a majority of its people living in cities. Moreover, GDP and consumption in cities is generally significantly higher than the national average. For example, per capita GDP in Jakarta or household consumption in Nairobi is nearly three times their respective national averages. Cities provide a place to identify promising businesses and -- thanks to growing regional connectivity -- expand their footprint.

This increase in regional connectivity is especially relevant to ex-BRIC growth markets, which require investors to adopt a regional perspective. Some of these markets are actively creating regional trading regimes such as the Pacific Alliance or ASEAN; others, like Turkey, are focused on becoming major regional hubs connecting continents. Either way, they are uniquely poised to benefit from the drastic increase in South-South trade, which at U.S. $1.7 trillion now exceeds South-North trade. The best businesses in these markets are already global brands and McKinsey expects the number of Fortune 500 businesses from growth markets to triple by 2025.

Yet while macro dynamics are helpful, what really matters is focusing on micro issues - which, from my experience, translates into identifying and investing with the right partners in the right markets in the right sectors. I believe that you have to be deeply local to do this. You can't cover Peru from Mexico City, let alone from New York. Since most mid-sized, consumer-facing businesses in these markets remain family-owned, private equity provides a unique access point that is complementary to investing in public companies. There are risks, of course, with all investments, but I believe the opportunity remains compelling and that investors with the right combination of local knowledge, world-class expertise, relevant experience and discipline will continue to do well.

We are not alone in this view. The world's leading long-term investors, multinational companies, sophisticated pension funds, endowments and even governments are already putting their money to work in growth markets. At Abraaj, we certainly agree with them that the best is yet to come, and those who seize the moment now will benefit the most.

This post is part of a series produced by The Huffington Post and The World Economic Forum to mark the Forum's Annual Meeting 2014 (in Davos-Klosters, Switzerland, Jan. 22-25). The Forum's Strategic Partner community comprises a select group of leading global companies representing diverse regions and industries that have been selected for their alignment with the Forum's commitment to improving the state of the world. Read all the posts in the series here.