BLOG: Back to emerging market basics
Amid the tragedy of the Russia – Ukraine war and ongoing uncertainty in markets, UK investors are grappling with rising interest rates, energy price hikes and inflation eroding their purchasing power and savings.
In a world still recovering from the Covid-19 pandemic, Brits could look abroad for long-term investment opportunities. And with emerging market economies accounting for 65% of global growth, this sector may be a good option for investors.
Breaking emerging markets down
Emerging markets include countries not yet fully developed in terms of either their economies or markets. In many cases, they are growing rapidly ahead of developed countries. The MSCI Index of Emerging Market securities comprises of 24 countries across Asia, Europe, Africa, Latin America and the Middle East, including the likes of China and India, Peru and Greece.
Emerging markets used to be a bit easier to categorise. Thirty years ago, it was all about ‘investibility’ as very few markets were open to foreign investors. However, the emerging markets landscape has changed rapidly over the past three decades, with many opening to foreign investors and being added to international benchmarks, including Saudi Arabia in 2019.
Each market has its own nuances and a distinct economic and financial evolution. While some markets have grown as suppliers of resources, others developed as providers of manufacturing expertise; either by offering services or because of their large, untapped consumption potential. Additionally, others have become market leaders in technology development.
Rapid growth rates
Emerging markets have comprised of some of the world’s fastest growing economies, particularly China, South Korea and Taiwan, which have grown significantly over the last three decades. Even while China is experiencing a current economic slowdown because of Covid-19 and calibrated government policies, its gross domestic product (GDP) expanded 8.1% in 2021. We believe emerging markets could continue to grow faster than developed countries over an extended time horizon.
Young and growing populations
Emerging markets generally have youthful, digital-savvy populations. In many cases, their needs aren’t being met, so there is significant opportunity for new players to enter and innovate. For example, in India, about 800 million people are under 35. For investors, this creates opportunities in areas like technology, but also financial services and aspirational products including education and luxury goods.
Even before the pandemic, emerging markets were at the forefront of technological innovation.
South Korea and Taiwan are leaders in semi-conductors, which form the basis of almost all modern gadgets and industrial and consumer products. With the push towards cleaner energy, solar power should see an acceleration in adoption. China has become the global manufacturing hub of much of the solar power supply chain and stands to benefit immensely.
Another big theme globally is the mobility and electrification of the transportation sector, including battery production, where both China and Korea have become frontrunners. E-commerce has started to boom across all emerging markets, and we have seen disruption in retailing in many markets including nascent ones like Brazil, India, Latin America and others in the ASEAN (Association of Southeast Asian Nations) region.
Key emerging markets have announced climate-aware ambitions, including legislation for some, to limit and reduce emissions as well as more direct plans to tackle major environmental concerns. For example, China’s efforts to achieve net-zero carbon by 2060 will contribute significantly to global efforts as the country accounts for 30% of worldwide carbon emissions, and its pledge represents two-thirds of aggregate emissions across countries that have committed to net zero.
Strong investment returns longer-term
The potential gains that could have been made through emerging market investing over the years are compelling. For instance, an initial one-off lump sum investment of £1,000 in February 2004 and tracked over a child’s life until they are 18 would be worth around £6,831 in February 2022, when invested with TEMIT. This is roughly 111% greater than if the same investment had been made in the FTSE 100 (approximately £3,242).
While emerging markets have a lot to offer, it’s worth highlighting some of the potential investment risks. Emerging markets can potentially be more volatile because of local political upheavals, natural disasters, currency fluctuations and sometimes lower levels of corporate governance than developed markets. Investors are encouraged to take a long-term approach to emerging market investing and look beyond the headlines.
We believe now is an interesting time for investors to consider emerging markets. The opportunities for further growth, innovation and sustainability of business models, not to mention a stronger resilience compared to decades past, create an attractive future for these economies. Emerging markets are a long-term story of evolution and progress.
Chetan Sehgal is lead portfolio manager at Templeton Emerging Markets Investment Trust (TEMIT)