Investors can’t think about emerging markets (EM) in the same way anymore. Advanced technology and the transition into consumption-led economies, mean this is a region in constant change. Meanwhile, many companies have embraced sustainability helping to drive through better outcomes. Here we look at how emerging markets have come of age and what’s on offer for investors.
Assessing the evolution of EM
What are the key drivers of change?
How can investors get the best out of EM?
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truths &
misconceptions
emerging markets
Emerging markets are at the forefront of technology and innovation. From artificial intelligence and big data, to fintech and healthcare. Emerging market companies are breaking new ground and defining innovation on their own terms.
Emerging markets have transformed into a consumer powerhouse. Rising wealth, internet access and increasing domestic production have ignited mass consumption from a booming Asian middle class.
Asian markets alone are
on track
to drive
40% of
the world’s consumption by 2040.
(Source: McKinsey & Company)
(Source: McKinsey & Company)
(Source: Dieleman, Joseph L et al, The Lancet. Volume 389, Issue 10083, 2005 - 2030)
Nearly 80% of Indian households will be categorised as middle income by 2030, up from 50% today.
Between 2007 and 2017, China nearly tripled its production of labour-intensive goods from US$3.1 trillion to US$8.8 trillion.
Emerging markets are home to half of the world’s population, and despite some countries having a very young workforce, others are aging rapidly. Aging population, rapid urbanisation and high consumption in EM mean expenditure and development in healthcare is only set to grow and remain a long-term trend for investors.
By 2040, healthcare spending in EM is expected to increase as a percent of GDP by 24.4% compared to 9.8% in developed markets.
(Source: World Economic Forum)
(Source: McKinsey & Company)
The coronavirus
pandemic might have changed
the growth path of EM, but through
region-by-region and stock-by-stock selection, investors can find plenty of long-term
opportunities both in equities
and fixed income.
Major changes in the msci em index
show the shifting economic landscape
In the past 10 years we have seen a major shift in focus. In 2009, the energy and materials sectors made up around 30% of the MSCI Emerging Markets Index. Today, they represent just under 12%.
Emerging markets have shifted from being commodity and manufacturing economies to technology and consumer-driven powerhouses. These are trends investors can no longer ignore. Still, selection is key. Companies
with high-quality balance sheets, low-cost production, and greater growth prospects
are likely to be the winners in EM.
As at 31 October 2020
information Technology and Communication Services have grown. combined they now make up around 32% of the index.
Source: MSCI; Financial data and analytics provider FactSet. Copyright 2020 FactSet. All Rights Reserved. Please refer to Additional Disclosure at the end of this material.
MSCI Emerging Markets Index Sector Weightings as at 31 October 2020
MSCI Emerging Markets Index Sector Weightings as at 31 October 2009
Meanwhile, with roughly US$17tn in developed market debt offering negative yields, EM debt remains attractive, especially EM corporates.
The crisis effect: Having responded promptly to the Covid-19 crisis, 2021 is shaping up better for emerging markets. There are a number of drivers; global growth and trade are are set to recover, US dollar strength is subsiding, Chinese demand is back to previous levels and many emerging market central banks have scope to cut interest rates further. This and the dispersion in terms of sector and stock performance offer opportunities to investors.
GOOD TO KNOW
As active managers we can take advantage of market inefficiencies in these types of markets, using our global research platform.
Emerging markets are much less efficient than developed markets. For an active manager this provides a real opportunity.
For the EM team at T. Rowe Price, having deep research capabilities and boots on the ground is key to generating alpha for clients.
How does
T. Rowe Price look at EM?
‘Within the EM fixed income universe, many regions and sectors offer defensive qualities that can outperform other asset classes during periods of risk aversion’
Andrew Keirle
Portfolio Manager, Emerging Market Local
Currency Bond Strategy, T. Rowe Price
ESG takes centre stage
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Emerging markets have made significant progress in relation to environmental, social, and governance (ESG) factors. But there is still a perception among investors of an ‘ESG shortfall’ when it comes to emerging markets, especially in regard to information disclosure. Active investors, however, can find underappreciated companies that are improving or strengthening their ESG practices.
Within emerging markets, integrating ESG considerations into your fundamental research can help to identify well-managed companies that are more forward-thinking, better at anticipating and mitigating risk, and focused on the long term delivery for shareholders.
Ernest Yeung
Portfolio Manager, Emerging Markets Discovery Equity Strategy,
T. Rowe Price
‘Being able to draw upon timely ESG analysis adds an important and differentiating component to investment decision making’
ESG HAS MADE A DIFFERENCE
September 2007 to October 2020. Data rebased to 100 as at September 2007.
Past performance is not a reliable indicator of future performance.
Source: MSCI. Please refer to Additional Disclosure at the end of this material.
What doES T. ROWE PRICE look for in companies when it comes to ESG?
ESG is a fundamental part of our investment process. Our proprietary Responsible Investing Indicator Model (RIIM) builds a distinct responsible investing (RI) profile of each corporate entity, flagging any elevated RI risks or positive RI characteristics.
By measuring companies’ RI profiles, we can more easily build an investment thesis for each security, which ultimately helps to create a better portfolio of investments.
What doES T. ROWE PRICE look for in companies when it comes to ESG?
Strong or improving ESG standards
Clear potential for fundamental change
Contact us for more information
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Source: Bloomberg Index Services Limited, as at 6 November 2020. Please refer to Additional Disclosure at the end of this material.
Index: Sep 2007 = 100
Emerging markets risk - Emerging markets are less established than developed markets and therefore involve higher risks.
