Global South emerges as world's 4th bloc for economic growth

New Straits Times

16-05-2025

THE era of "United States exceptionalism" may be over — and with it, the Washington-led world economic and financial order of the last 50 years.
This leaves investors with a big question: How will this reshape capital flows?
The most obvious destination is Europe, home to the world's second-largest economy and second-biggest reserve currency, where markets are deep and liquid and the rule of law reigns supreme.
The so-called "Global South" may seem less attractive. Its 100-plus disparate countries, excluding China, carry the typical smorgasbord of emerging market risks, including political instability, legal concerns, and policymaking credibility.
But the global economic and investment landscape is changing rapidly — and perhaps irreversibly — and investors may be skittish about once again finding themselves over-concentrated in any one region.
Investors with long-term horizons and high risk thresholds may, therefore, increasingly consider boosting their allocations to this enormous and varied "bloc."
These countries have long punched below their financial market weight. But could they be poised to benefit from a global capital reallocation shift?
That's among the findings in a report published last week by Deutsche Bank strategists, The Global South: A Strategic Approach to the World's Fourth Bloc.
"The time for the Global South is now," states the report, which broadly defines the bloc as the 134 member countries of the G77 group of nations, excluding China, Russia, Singapore, and a few others, and adding Mexico, Turkiye, and some Central Asian countries.
Some numbers here are worth noting. The group is home to almost two-thirds of the world's working-age population, produces 40 per cent of the world's energy and key transition metals, accounts for a quarter of global trade, and has attracted nearly a quarter of all inward foreign direct investment (FDI) over the past decade.
Indeed, the Boston Consulting Group says FDI in the Global South in 2023 totalled US$525 billion, surpassing FDI into advanced economies, which stood at US$464 billion.
And while it is far too early to say how countries will align politically, economically, or militarily in the years ahead, there are already signs of capital rotating into the Global South and away from China.
Deutsche Bank's report notes that foreign investment into the Global South has held relatively steady in recent years.
China's economic rise in recent decades has been one of the most astonishing in human history. In 1990, China accounted for only two percent of developed economies' gross domestic product (GDP).
By 2021, that figure had reached 33 percent, almost matching the Global South's then share. But China's growth rates have stalled, especially since the pandemic.
The International Monetary Fund forecasts China's share of advanced economies' GDP will end this decade around 35 percent, while the Global South's share will rise to a new high of 40 percent.
From an equity allocation perspective, there is a lot of space to grow. The Global South made up a mere 11 per cent of global market capitalisation at the end of last year, with India and Saudi Arabia accounting for more than half of this share.
If the dominance of US equities wanes — they currently make up more than 70 per cent of global market cap — even a tiny reallocation to this group could have a big impact on valuations in these countries.
The risks, however, are manifold, and many were on display during the market turbulence sparked by US President Donald Trump's tariffs.
"The current environment differs fundamentally from past episodes. This is not an exogenous shock but a deliberate policy action with structural objectives. As a result, the scope for rapid normalisation is limited," said the Institute of International Finance.
But what really matters here are not "rapid" moves, but the structural changes in the global economy that the US administration's unorthodox policies may have catalysed.
It's worth remembering that Chinese exports to "conductor economies" in the Global South have doubled since Trump's first trade war in 2018.
Given how unreliable the US now appears, it is reasonable to assume that both China and Europe may be seeking to further diversify their export markets.
So perhaps the time is not now for the Global South — but it could be coming soon.