…and why there is still a compelling reason to invest
This week we look at emerging markets. When investors talk about emerging markets, they are generally referring to markets which present investment opportunity, but which are still underdeveloped. The fact they are underdeveloped – whether economically, politically or even simply in regulatory terms – means they are higher risk.
As most investors know, higher risks can mean the potential for higher returns and for this reason, emerging markets have been popular with retail investors, professional investors and institutions for many years, often providing a bumpy, but rewarding ride along the way.
In recent years, there has been a strain on some of the economies defined as emerging markets. In part, this is due to an anticipated end to the US Government’s policy of quantitative easing (pumping money into the financial system by purchasing assets) and low interest rates. The artificial liquidity created by the QE programme and low interest rates, has in turn been supporting emerging markets in many ways, and so its end is expected to have a negative impact.
But what are the longer term trends? Is investing in emerging markets still a good idea? Here are seven facts about emerging markets which tell a broader story:
1) Population
Two of the world’s largest countries by population are deemed to be emerging markets – China and India. A staggering one in five people in the world are Chinese and one in six are Indian and, with a total of 84% of the world’s population in emerging markets, that is nearly 6 billion people accounted for.
2) Consumption
The 6 billion people in emerging markets are all becoming “consumers” in the capitalist sense of the word. According to McKinsey & Company, by 2025, annual consumption in emerging markets will reach $30trn, which they describe as “the biggest growth opportunity in the history of capitalism”.
To put this into context, this is up from $12trn in 2010 and means emerging market consumption will account for nearly 50% of the world’s total consumption in 10 years’ time.
3) A new industrial revolution
The industrial revolution in China is in full swing and has been for some time. India is also well on its way, but that doesn’t mean this particular story is over. Because of their size and the speed with which the revolution has been taking place, McKinsey & Company estimate that the two emerging economies are experiencing roughly 10 times the economic acceleration of the Industrial Revolution Britain and the US experienced 100 years ago, on 100 times the scale, resulting in an economic force that is more than 1,000 times as big.
4) Economic powerhouses
The revolution taking place in these emerging economies means that their output is increasing significantly year-on-year. Emerging market economies will account for around 36% of the world’s GDP this year and are expected to contribute up to 70% of GDP growth between now and 2025.
5) Rising middle class
The wealth being created by the industrial revolution is creating a “middle class” of workers who have some disposable income for luxury items such as technology goods and clothes.
This is an area many fund managers try to tap into, by buying shares in countries based in developed nations but which sell goods into emerging economies. The reason for this is they can benefit from the upside of exposure to emerging markets, while limiting some of the other uncertainties.
It is also a noticeable and interesting fact that more billionaires are being created in emerging economies than their developed counterparts – a sure sign of opportunity.
6) Technology
Skipping much of the development which saw more advanced economies go from telephone lines to mobiles via dial up-modems, emerging economies are embracing technology in a big way. Communications companies have been tapping into this growth for years, but there is still juice in the story yet.
In its 2014 annual report, Vodafone identified emerging markets as having the “most potential for future mobile customer and revenue growth driven by rising populations, strong economic growth, lower mobile penetration, and a lack of alternative fixed line infrastructure”. It added that “according to industry analysts, by 2017 there will be 1.7 billion new mobile users across the globe, and most will be from emerging markets”.
7) Hidden gems
Some countries deemed to be emerging markets may surprise you. The United Arab Emirates was only added to the official list of emerging markets by index provider MSCI last year – an upgrade from “frontier market” status. Meanwhile South Korea, famed for its tech and with the 13th biggest annual GDP, is also an emerging market.
Investing is never without its risks, and when you invest in more volatile economies, these can be increased, but if these seven facts have inspired you to look again at emerging markets, click the link below to talk to a member of our team.
