John Maynard Keynes’ third or perhaps fourth most quoted quote, the one about how everyone is dead in the long run, is often cut short too early. This can be found on page 80 of A tract on monetary reform, in the middle of a discussion about how the quantity theory of money is applied incorrectly.
To paraphrase it very roughly, Keynes says that changes in the money supply have no predictable effect on prices because people don’t know or care what economists say will happen. The theory of how money flows and purchasing power interact may eventually turn out to be correct, but to rely on it is to look through the telescope the wrong way:
(T)his long term is a misleading guide to current events. Eventually we are all dead. Economists are setting themselves too easy, too useless a task if all they can tell us in turbulent seasons is that when the storm is long gone, the ocean will be flat again.
Anyway, Goldman Sachs released a note this morning predicting how big the world’s capital markets will be in 2075. It builds on work published in December that did the same for the global economy and concluded: , and India are likely to remain the three largest economies and, with the right policies and institutions, seven of the world’s top ten economies are expected to be emerging markets.”
To roughly paraphrase it again, Goldman says that ratios of market capitalization to GDP tend to increase with GDP per capita. And while real GDP growth has slowed over the past 10-15 years for both developed and emerging economies, income convergence has continued despite an economic crisis and pandemic.
The continued convergence of EM-DM incomes means the distribution of global income will shift towards a “growing group of ‘middle-income’ economies” falling deeper into the warm embrace of market capitalism, it says. That means the US will be overthrown by China in 2035 and overtaken by India in 2075, etc.:
Today’s update focuses on the future capitalization of the stock market. It’s a fairly simple exercise where the long-term forecasts are run through a table of market capitalization relative to GDP (because the market value of stocks as a percentage of GDP tends to be higher between richer countries) and estimates of GDP per capita (where there is more of a rising-tide-lifts-all-boats type of relationship).
As income levels rise, growth in emerging market equities will outpace GDP growth, Goldman says. A national wealth effect means “the equalization of corporate assets, the deepening of capital markets, and the disintermediation that occurs as financial development progresses.”
The conclusion: look at India.
Our projections imply that emerging markets’ share of global equity market capitalization will increase from about 27% today to 35% in 2030, 47% in 2050 and 55% in 2075. We expect India to record the largest increase in global market capitalization share — from just under 3% in 2022 to 8% in 2050 and 12% in 2075 — reflecting favorable demographic prospects and rapid GDP per capita growth. We forecast that China’s share will rise from 10% to 15% in 2050, but will decline to around 13% in 2075 due to a demographically-led slowdown in potential growth. The increasing importance of equity markets outside the US implies that the share is expected to fall from 42% in 2022 to 27% in 2050 and 22% in 2075.
But also keep buying all stocks everywhere, says Goldman. They are all good, in the long run:
Do our projections that the share of emerging markets in global equity market capitalization will rise at the expense of the market of DMs mean that long-term investors should consider emerging market equities? Not necessary.
To the extent that emerging market capital market growth comes from corporate asset clearing – and we expect it will the important driver — this has no obvious implications for stock performance itself.
That said, we expect emerging market equities to outperform DM equities over the longer term for other reasons, namely the combination of stronger long-term earnings growth and multiple expansion as risk premiums fall.
What could go wrong? These are the risk factors:
Among the many risks to our economic forecasts, we have identified rising protectionism and climate change as the main long-term risks. Of these, we consider the first to be the main risk to capital markets growth, in particular the risk that populist nationalism leads to increased protectionism and a reversal of globalization.
The successful development of open capital markets is particularly exposed to this risk, as it depends on the ability and willingness of investors to invest capital in foreign jurisdictions. To date, the rise of populist nationalism has led, in our view, to a slowdown rather than a reversal of globalization. However, there are already examples of populist nationalism leading to marked reductions in openness to trade and capital flows – such as the impact of Brexit on the UK – and the risk of a wider globalization reversal is evident.
The development of deep equity markets also requires the commitment of domestic policymakers to follow a mix of capital market friendly policies that encourage innovation, transparency, listing, protection of private property rights, etc. It is impossible to include all of these elements satisfactorily in an analytical framework, which is why we focused on the broader relationship that exists between GDP per capita and stock market capitalization ratios. By modeling the growth of the equity capital market in this way, we implicitly assume that the conditions for economic growth are also the conditions for capital market development. But this will not always be the case, which carries risks (particularly for our EMC projections for each individual country).
Finally, the development and proliferation of generative artificial intelligence is another major risk to our projections. As it is likely to increase global productivity and GDP per capita, we see it as an upside risk to the development of global capital markets. However, as the effects seem likely to be larger in DM than in EM economies, this implies downside risk to the expected increase in the share of EMs in global equity market capitalization.
Goldman’s economists hardly disagree with Keynes on the ultimate value of this exercise, although the latter is a better writer than the former:
Making economic projections over a 50-year horizon for 104 countries inevitably involves a considerable degree of risk and uncertainty. Given the difficulties of predicting even one or two years ahead, some readers may be skeptical of the value of predictions reaching that far into the future. However, an advantage of making long-term forecasts is that cyclical risk – a major source of short-term forecasting errors – tends to revert to the mean over time, so GDP is largely determined by slower-moving trends in population, capital and technology.
Other long-term forecasts are available. For example, according to the 2019 movie, 2075 is the year an earthquake destroys Earth’s fusion engines and sends our frozen planet and its underground population into a collision course with Jupiter The Wandering Earth. How these events affect the capitalization of global stock markets is not a theme the film explores in comparable detail.