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The best of both worlds - Why now for Emerging Markets

Emerging markets continue to offer exciting investment opportunities. We highlight the driving forces behind these opportunities and why the time to act is now.

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Date published
18 Nov 2021
Tag

Emerging market companies are global and domestic leaders

Positive change has altered the investment landscape

Emerging markets have experienced significant positive change over the past decade. Economic growth, urbanisation, the rise of middle-class consumers and the mass adoption of technology have all combined to alter the investment landscape.

The mass adoption of technology has enabled companies to penetrate further into rural areas and different sectors of society within emerging markets. This, coupled with the younger generation of consumers and their inclination toward digital, has helped to support the growth of internet/platform industry. In particular, in Asia these platform-based companies have been very successful because the social and structural contexts in which they began are very different.

Take microfinancing for example, Bank Rakyat Indonesia is helping a sector of society obtain financing where previously it may have been inaccessible to them. This may be for a variety of reasons including not having credit scores or lack of physical access. The ability to access financing from an app on their phone suddenly opens up a world of opportunity for that individual.

Fig. 1 STEM graduates create an increasingly sophisticated workforce1

The huge underpenetrated market, the speed of innovation and the quick adoption by consumers in turn creates an opportunity for investors not only to support an interesting business idea but also to make a positive impact.

Emerging markets have given rise to global leaders

The positive trends identified above have helped the growth of a variety of businesses in emerging markets. Alongside broader economic growth, the last decade has seen companies move up the curve in terms of complexity, human capital and intellectual property (IP). Many of these companies are leading the way in a global marketplace and are considered best-in-class, without true developed market peers.

The swathes of graduates in STEM subjects (science, technology, engineering and mathematics) have helped to create a highly skilled workforce, which is already innovating as seen by the high concentration of patent applications coming from these countries (figures 1 and 2).

Fig. 2 Top 20 national patent office with most applications in 2019 (try to find updated data)2

A key example of global leadership is in the smartphone (and component) markets. South Korean company Samsung Electronics is not only a smartphone manufacturer but also a key supplier of smartphone and electronic components to other leading global brands. The Taiwanese giant TSMC is the world’s largest semiconductor foundry.

Emerging market companies are also actively contributing to a worldwide effort to reduce fossil fuel use. Companies such as LG Chem or CATL are global leaders in electric vehicle battery production, key suppliers to developed and emerging market automobile companies.

Ultimately excluding emerging market companies arbitrarily restricts your investable universe and limits your exposure to world-leading companies who are integral parts of the global supply chain.

Strong consumption trends and structural reforms have supported domestic players

Whilst an exciting new breed of world-class companies has grown to represent the new face of emerging markets, there are many long-established companies operating in domestic markets, which are also benefitting from strong consumption trends and structural reforms. This breed of companies exists in many areas, for example, Indian jewellery.

In India the tightening of regulations in the retail sector is helping to push the market from an informal to organised part of the economy. Titan Industries is using technology to allow browsing of its luxury jewellery collections online before completing purchases, helping to build trust in the brand. This design-led experience and the move toward an organised market mean that companies like Titan are positioned well to benefit in the domestic market.

The time to act is now

Fig. 3 Real GDP growth in selected world regions 2018-2022 (%)3

As long-term investors, we focus on the investment opportunity over at least a five-year time horizon. This often means that the answer to the ‘why emerging markets now?’ question can be somewhat blurred with the ‘why emerging markets?’ question.

Our investment decisions are not led by market timing but by the long-term opportunity for sustainable growth. This being the case, we are yet mindful that there are both macro and micro factors at play which make emerging markets an attractive opportunity now.

Emerging markets exhibit superior growth

Despite the commonly used argument that emerging market growth is slowing down, in real GDP terms, emerging markets continue to exhibit superior growth when compared to developed markets and global markets (see fig. 3). This is expected to continue, according to the UN DESA, with emerging markets driving global GDP growth higher at least for the next few years.

The opportunity is attractively valued

A common measure for gauging a broad sense of how the market is valued is the ratio of price-to-book (P/B). It is a common misconception that emerging markets are expensive compared to developed or global markets. In fact, emerging markets are actually trading close to their 20-year relative lows, as measured by the MSCI Emerging Markets vs. MSCI World (see fig. 4), suggesting the opposite is true. We think this demonstrates that emerging markets are an attractive investment opportunity.

Earnings rebound expected

The final point we wish to share is that there is broad market consensus that there will be a strong corporate earnings rebound in 2021 and 2022 for emerging market companies. The post-pandemic bounce-back will help support cash flows and growth. 2021 may see as much as 56% growth in earnings in 2021 for the MSCI Emerging Markets Index and a further 7% increase in 2022, both higher expectations than developed markets as measured by the MSCI World Index (fig. 5).

Combined with the attractive valuations and broader economic growth outlook, the expected corporate earnings rebound signals that the current market environment presents an exciting investment opportunity for emerging market investors.

Fig. 5 Estimated Earnings Growth (%) Emerging Markets vs. World5
Fig. 4 Relative P/B (NTM) – Emerging Markets vs. World4
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The information provided should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the security transactions discussed here were, or will prove to be, profitable.

1Source: Statista, World Economic Forum. 2016 graduates in Science, Technology, Engineering and Mathematics

2Source: Statista and WIPO, World Intellectual Property Indicators 2020, p.27

3Source: Statista and UN DESA. World Economic Situation and Prospects as of mid-2021, p.3. Growth is compared to the previous year. *Part estimate. †Forecast.

4Source: FactSet

5Source: FactSet, November 2021



Regulatory information and risk warnings

This information is issued and approved by Martin Currie Investment Management Limited (‘MCIM’), authorised and regulated by the Financial Conduct Authority. It does not constitute investment advice. Market and currency movements may cause the capital value of shares, and the income from them, to fall as well as rise and you may get back less than you invested.

The information contained in this document has been compiled with considerable care to ensure its accuracy. However, no representation or warranty, express or implied, is made to its accuracy or completeness. Martin Currie has procured any research or analysis contained in this document for its own use. It is provided to you only incidentally and any opinions expressed are subject to change without notice.

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The views expressed are opinions of the portfolio managers as of the date of this document and are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. These opinions are not intended to be a forecast of future events, research, a guarantee of future results or investment advice.

Risk warnings – Investors should also be aware of the following risk factors which may be applicable to the strategy shown in this document.

  • Investing in foreign markets introduces a risk where adverse movements in currency exchange rates could result in a decrease in the value of your investment.
  • This strategy may hold a limited number of investments. If one of these investments falls in value this can have a greater impact on the strategy’s value than if it held a larger number of investments.
  • Smaller companies may be riskier and their shares may be less liquid than larger companies, meaning that their share price may be more volatile.
  • Emerging markets or less developed countries may face more political, economic or structural challenges than developed countries. Accordingly, investment in emerging markets is generally characterised by higher levels of risk than investment in fully developed markets.

For institutional investors in the USA:

The information contained within this presentation is for Institutional Investors only who meet the definition of Accredited Investor as defined in Rule 501 of the United States Securities Act of 1933, as amended (‘The 1933 Act’) and the definition of Qualified Purchasers as defined in section 2 (a) (51) (A) of the United States Investment Company Act of 1940, as amended (‘the 1940 Act’). It is not for intended for use by members of the general public.

For wholesale investors in Australia:

This material is provided on the basis that you are a wholesale client within the definition of ASIC Class Order 03/1099. MCIM is authorised and regulated by the FCA under UK laws, which differ from Australian laws.