Four trends in emerging markets

Investing

Emerging markets continue to offer good potential for investors, says John Moorhead, head of global emerging markets, Maple-Brown Abbott.
Key Takeaways
  • Both China and India are experiencing a dramatic shift in the number of people moving up into the ‘middle income’ bracket, driving ever-increasing demand for goods and services
  • Around half of emerging markets are currently experiencing an ageing of their populations
  • Companies are seeking to diversify their supply chains and bring them closer to home, or to more benign countries, such as Mexico or southeast Asia
Tuk Tuk parked in front of the Independence monument, inspired by Khmer traditional architecture, in Phnom Penh, Cambodia capital city at night.
investors in emerging markets need to keep an eye on the macroeconomics and bigger picture trends., says John Moorhead, head of global emerging markets, Maple-Brown Abbott. | Image source: Getty Images

There are four key macro themes driving growth across emerging markets (Asia, Eastern Europe, the Middle East, Africa and Latin America) that investors should be aware of, the head of global emerging markets at Maple-Brown Abbott, John Moorhead, says.

1. Mass consumption

Both China and India are experiencing a dramatic shift in the number of people moving up into the ‘middle income’ bracket, driving ever-increasing demand for goods and services.

The sheer scale of this is unprecedented in human history. In the last decade, over 50 million people per year in China were lifted from poverty to the middle class. India could be the next major driver of this trend, where there is still around 300 million people living on less than $10 a day and consumption is growing by seven per cent a year.

The relative youth of many these populations is also a factor in the growing consumption. In Saudi Arabia, for example, the median age is 28 years old, and half the population is under 30. This compares to Australia’s median which is 37 years old.

2. Healthcare

The flipside to this mass consumption theme is that around half of emerging markets are currently experiencing an ageing of their populations. In China, North Asia and Eastern Europe, the average age is now rising. For example, in China the number of marriages peaked in 2012 and, while the one child policy was removed in 2016, the birth rate continues to fall.

This brings its own dynamics as spending shifts towards health care and older age products. Investment in and spending on health care will be a massive trend in emerging markets over the years ahead.

To put this in perspective, China currently spends around $500 per person a year on health care. This compares to the global average of $1,100 per person globally while in developed markets, it is closer to $4,000 per person.

3. Energy transition

For the world to transition to a low carbon economy will require efforts from both developed and emerging markets. While emerging markets are the largest total contributors to greenhouse gas emissions, we believe emerging markets also have the potential to provide the solutions the world needs.

Chinese President Xi Jinping’s presentation to the United Nations in September 2020 was a massive structural change, targeting peak emissions by 2030 and to be carbon neutral by 2060. Already, 70 per cent of the world’s solar panel production capacity is based in China. Across the board, emerging markets have all the raw materials and industrial capacity needed for the energy transition, including copper and lithium mines, through to battery and wind turbine makers and electric vehicle manufacturers.

4. Localisation and automation

The theme of localisation and automation is being driven by two major tailwinds – the ageing population and the geo-political risks and supply chain issues exposed by the COVID-19 pandemic.

Companies are seeking to diversify their supply chains and bring them closer to home, or to more benign countries, such as Mexico or southeast Asia. For instance, Samsung employs over 100,000 people in Vietnam and contributes to about a quarter of Vietnamese exports. At the same time, governments are focusing on developing their own industrial bases to ensure supply of critical components. This is a global trend but one that is clearly apparent in emerging markets.

Conclusion

The bear market in emerging market equities is well advanced, says Moorhead. While our investing focus is primarily on company fundamentals and stock selection, we believe investors in emerging markets need to keep an eye on the macroeconomics and bigger picture trends. Despite the current macroeconomic situation, there are some big underlying themes that will continue over the longer term regardless of short-term sentiment and markets.

In fact, the sell-off that’s happening now can allow investors to identify opportunities that are going to benefit from those longer-term themes at very attractive valuations, says Moorhead.