Emerging Markets: Five Positive Trends

Martin Currie: With the pandemic dominating the short-term outlook, the longer-term advantages of Emerging Markets companies become more important in the pursuit of return.

    The rise of megacities

    Urbanization 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.

    Rising middle class

    Urbanization generally brings with it growth of the middle class in emerging markets. That’s changing consumption habits – and sparking demand for a broader range of goods and services.

    • 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

    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.

    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.

    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.

    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.


    DEFINITIONS

    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.

    WHAT ARE THE RISKS?

    Past performance is no guarantee of future results.  Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

    Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls. International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.

    U.S. Treasuries are direct debt obligations issued and backed by the “full faith and credit” of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasuries, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S. government. Even when the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.

    ENDNOTES

    1. Source: United Nations, Department of Economic and Social Affairs. Based on countries in the MSCI AC Asia Pacific ex Japan Index.

    2. Ibid