With the pandemic dominating the short-term outlook, the longer-term advantages of Emerging Markets companies become more important in the pursuit of return.
Faster Economic Growth
Emerging markets are forecast to grow almost three times as fast as developed markets over the next five years. EM’s share of global GDP, already 40.2%, should rise even higher. Because stocks are the asset-class most sensitive to earnings growth, stock-market investors cannot afford to ignore the relative growth rate of economies in selecting their equity allocations.
7 of the World’s 10 Largest Economies will be “Emerging” by 2030
Source: Visual Capitalist. Based on IMF (2017 data), Standard Chartered (2030 projections), Oxford Economics, Brookings Institute.
The Martin Currie Emerging Markets Team takes an active approach to selecting the countries with attractive economic and demographic trends as well as compelling individual investment exposures to craft a portfolio that balances a “best-ideas” mandate with the benefits of common sense diversification.
The Rise of Megacities
Urbanisation remains a powerful force in emerging markets, with cities swelling in population as jobs migrate from the countryside. There are already 20 “mega-cities” (i.e. with over 10 million population), and the number is projected to grow to 30 by 2030 – largely within the Asia-Pacific region—and 9 of the 10 largest cities will be in emerging markets.1
Top 10 Cities by Population, 2035 Projection in Thousands
Source: United Nations, Department of Economic and Social Affairs. Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.
This trend is worth noting because people in living in cities exhibit different consumption patterns than their rural counterparts. By investing in companies that are positioned to capitalise on these trends, we can better align our portfolios with the fundamental growth drivers of the emerging market economies.
Rising Middle Class
In emerging markets, urbanisation generally brings growth of the middle class. For example, the Asia Pacific region in particular is expected to see middle income growth skyrocket by 2030 with 3.5 billion people in the middle class—over 150% growth in just 15 years.2
This growth is changing consumption habits, and sparking demand for a broader range of goods and services. For instance, insurance is a high-margin service that is uniquely demanded by populations with middle-class incomes. As equity investors, we think carefully about how this demographic trend will translate into consumer behaviour and what that will mean for the companies we invest in.
Embracing Disruptive Technologies
Emerging markets are adopting newer disruptive technologies and adapting to digital life faster than developed markets.
China is now the world’s largest e-commerce market, boasting some of the highest user rates of financial technology services for money transfer and payments, savings and investments, and borrowing. What’s more, China and South Korea are both on the front lines of future innovation – ranking among the top 5 countries for total patent applications.
Top Five Countries for Patent Applications
Source: Statista, World Intellectual Property Organisation. Top five ranking of national patent offices with the most patent applications in 2016.
Technological innovation brings with it new types of businesses and thus differentiated profit pools. This means that if we can identify disruptive businesses, we will have the ability to tap into companies that are fuelled by the dual benefit of differentiated business models and strong underlying economic growth.
A New Business Landscape
Economic diversification has changed the shape of opportunity in EM. The last decade has seen a major shift away from energy and raw materials and toward consumer, financial and high-tech. That’s allowed more EM-based companies to act as industry leaders, especially in technology.
MSCI Emerging Markets Index Sector Exposure
Source: Factset and Martin Currie. 2008 sector exposure is as of 1 January 2008. 2019 data is as of 31 December 2019. Other includes Industrials, Utilities, Healthcare and Real Estate. Past performance is no guarantee of future results. Indexes are unmanaged and investors cannot invest directly in an index.
The combination of large urban centres and demographically young populations allows for innovative companies to scale digital businesses in ways that were previously impossible. For example, Ant Financial Services Group is currently developing artificial intelligence-based tools to more efficiently serve the financial needs of China’s 1.4-billion-person market.
Martin Currie take an active approach to identifying technological leaders that have the ability to leverage digital scaling and demographics to create world class businesses.
Australian investors are able to access Martin Currie’s actively managed, Emerging Market strategy via the Legg Mason BetaShares Emerging Market ETF (managed fund) (ASX: EMMG). Learn more about the ETF at our website HERE.
More on EM Now
Global Emerging Markets: Through the ESG Lens A new type of mechanism for drug procurement and pricing is among a series of regulatory reforms transforming the Chinese pharmaceutical sector.
Insurance: High Potential in Emerging Markets As emerging markets become wealthier, so does demand within them for financial services like insurance.
Death & Taxes Tax avoidance is a serious issue for governments stretched by rising costs, in both emerging markets and developed countries.
A Critical Juncture for China’s Pharma Industry A new type of mechanism for drug procurement and pricing is among a series of regulatory reforms transforming the Chinese pharmaceutical sector.
Learn more about Martin Currie's Global Equity Strategies:
1 Source: United Nations, Department of Economic and Social Affairs. Based on countries in the MSCI AC Asia Pacific ex Japan Index.
Developed markets (DM) refers to countries that have sound, well-established economies and are therefore thought to offer safer, more stable investment opportunities than developing markets.
Emerging markets (EM) are nations with social or business activity in the process of rapid growth and industrialization. These nations are sometimes also referred to as developing or less developed countries.
Environmental, Social, and Governance (ESG) refers to the three central factors in measuring the sustainability and societal impact of an investment in a company or business.
Gross Domestic Product (GDP) is an economic statistic which measures the market value of all final goods and services produced within a country in a given period of time.
The MSCI Asia Pacific ex Japan Index is a market capitalization weighted index that is designed to measure the equity market performance of the developed and emerging markets in the Asia Pacific region ex-Japan.
The MSCI Emerging Markets (EM) Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets.
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