In its current print edition, the Economist has a fascinating chart that deserves much greater attention than the small section devoted to it. It matches the combined value of listed firms in various emerging markets with global companies that have similar market capitalisation.
Indonesia's market is the size of Goldman Sachs, Facebook matches Malaysia and India is comparable to Nestlé. It is well known that a bunch of multinationals outstrip entire countries in economic value and performance. Nonetheless, the resulting map is quite extraordinary in reminding us of how unequal the world economy is.
The chart raises another important point: the lack of market depth in emerging countries. Deep markets are more resilient and less sensitive to changes in supply and demand. This is important for investors, especially long-term investors, as markets are more predictable and less risky. Market depth concerns Australia because it is a problem for many of the leading economies in our region.
It should also concern Australia in its capacity as the 2014 G20 chair. The Australian G20 presidency has indicated that one of its priorities will be infrastructure investment. But stepping up infrastructure investment in a truly global fashion (including in the emerging and developing world) will require tackling the issue of insufficient market depth in emerging countries.
Emerging Asia, in particular, has massive savings. But instead of investing these savings in productive projects addressing the continent's obvious infrastructure gaps, much of it flows to the advanced world. This creates a 'chicken and egg' problem, where investors are reluctant to commit to emerging markets because of insufficient scale, but scaling up requires precisely that type of strong investment.
The Australian G20 presidency will have to push for finding solutions to this issue if it wants to make a true impact with its investment agenda.
