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Please note: The Frank Talk articles listed below contain historical material. The data provided was current at the time of publication. For current information regarding any of the funds mentioned in these presentations, please visit the appropriate fund performance page.

Middle-Class Middleweights to be Growth Champions

March 30, 2011

Over the next 15 years, the number of children in middle-class households in emerging market cities around the world may grow 10 times faster than those in developed countries. This future generation living in places such as China, Latin America and South Asia should drive the demand for goods and services, housing and transportation that extend beyond the basic necessities of life.

In McKinsey Global Institute’s recently published report, “Urban world: Mapping the Economic Power of Cities,” the researchers focus on demographic and economic trends to determine which cities will provide the most economic growth in the future.

Shifting GDP Growth in Emerging Markets vs. Developed Economies 033011The pie charts show how dramatically the world’s economic weight is expected to shift over the next 15 years. Today, developed economies such as the U.S., Western Europe and emerging market megacities—cities with more than ten million people—contribute 73 percent of world GDP growth. By 2025, their contribution diminishes to a mere one-third of global GDP.

The largest drivers of this growth comes from small cities, rural areas and “middleweight” cities—those with populations between 150,000 and 10 million people—in emerging markets.

To establish which cities will be the next powerhouses, McKinsey developed a comprehensive list of urban centers they named the City 600, ranked by their GDP contribution. Currently, 23 megacities and 577 middleweights make up one-fifth of the world’s population and two-thirds are located in emerging market countries, including China, India and Latin America.

The population of these 600 cities is estimated to grow 1.6 times faster than global population, and 250 million new households are expected. China and Sub-Saharan Africa are two areas with the fastest pace of household growth, and both are expected to double by 2025. The growth in these emerging market cities could be so tremendous that by 2025, one out of every three developed market cities will likely be replaced by emerging world middleweights. China hosts the majority of these growth hotspots, but others include the cities of Fortaleza and Manaus in Brazil, Sharjah in the Middle East, and Nagpur and Vadodara in India.

Twelve of these emerging market middleweight cities are projected to grow to be megacities, each housing more than 10 million people by 2025.

Ranking the top 25 cities of today’s City 600 by GDP, the majority are in developed countries. However, three North American cities and four in Western Europe will be replaced by new megacities in Asia (see map).

Economic Growth Shifts Toward Asia 033011

McKinsey’s report expands on a theme we discuss often about how urbanization in many other developing countries drives global economic growth. As an example, in a previous blog, I discussed how China’s urbanization is driving housing growth and car sales (read the blog).

I encourage you to read the full McKinsey’s report and explore their interactive charts. McKinsey’s report offers a great visual representation of emerging market trends and validates our expectation that rising urban, middle class populations in developing world will continue to drive demand for commodities, natural resources and infrastructure projects. As McKinsey states, “urbanization will be one of this century’s biggest drivers of global economic growth.”

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