Market and Economic: Global Investment Forum

Pendulum to swing back in favor of emerging markets

pendulum to swing back in favor of emerging markets banner

While there are short-term challenges in emerging markets as a function of trade war concerns, political problems, a stronger U.S. dollar and rising U.S. interest rates, we believe they offer tremendous investment opportunities in the longer term.

Increasingly diverse emerging markets are making an ever-greater contribution to global growth. And that trend is set to persist over the medium to long term.

We are also seeing material changes taking place at the underlying development stage in many emerging markets, with much of that being facilitated by technology. For example, hundreds of millions of people are now getting their first smartphone. This small piece of hardware – something we take for granted in the developed world – has the scope to unlock a host of new opportunities, from healthcare and education to applications that help small businesses increase their productivity and profitability on a day-to-day basis.

At the macro level, we are also seeing demographics as a significant driver of growth across many economies. Here, the prospects are most compelling in those countries where the largest proportion of the population is at its most productive age. It is interesting to observe, for example, that Mexico has reached the same production-age sweet spot that Japan did in 1970.

Another important trend to note is urbanization. With millions migrating to cities across the emerging markets, infrastructure spending is likely to be a major driver of secular growth.

Our long-term growth outlook for emerging markets remains favorable, notwithstanding the inevitable short-term challenges we will meet along the way. However, in many instances, it may be better to play that growth dynamic through developed market exposure and companies that export products to emerging markets to take advantage of growth and consumption in those areas, rather than investing in emerging markets directly.
 

Emerging markets (EM) vs developed markets (DM)
Source: Bloomberg, as of September 2018.

 
There is, nevertheless, a tremendous opportunity for governance improvements to make emerging markets more resilient to financial downturns, while enhancing the efficiency of their stock markets. Authorities have recognized the importance of good corporate governance to attract investment flows, spearheading reforms that aim to tackle the risks associated with ownership by founders and governments, poor disclosure, and weak protection mechanisms for minority shareholders. At the same time, governance is improving, particularly in Asia, to a large extent in response to companies’ increasing appetite to engage with, and learn from, investors.

The impacts of global changes shaping society, including technology, population growth and climate change, will be disproportionately felt across the developing world. The long-term success of companies in these countries, therefore, hinges on their ability to integrate these and other pressing environmental and social issues pertinent to their businesses into strategic decision-making. We support the effort that companies have made to think more holistically about sustainable growth, including their impacts on the environment and society. As active stewards of capital, we will continue to engage with them to improve their overall approach to managing environmental, social and governance (ESG) risks and opportunities and, in the process, help protect and enhance shareholder returns.

 

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