Not your parents' emerging markets
Many developing economies are home to global technology leaders.
When investors think about investing in emerging-market (EM) equities, they often think of a much different era—and an entirely different asset class—than is the case today. In years past, investing in developing markets may have invoked images of maverick investment managers scouring the world in private jets and investing in far away, exotic underdeveloped countries with extremely high volatility.
Such countries experienced massive boom-and-bust cycles few investors could understand, much less stomach. Many may have possessed inadequate infrastructure, high birth rates, little to no manufacturing, high levels of poverty and most important, economies entirely dependent on such cyclical industries as energy, state-owned banks and raw materials. There were few, if any, technology or health-care companies worthy of investment. It was all about commodities and balance of payments.
Today, it’s a new world. Countries and regions that make up the EM complex as represented by the MSCI Emerging Market Index have changed dramatically from their respective index weights 20, even 10 years ago. For example, 20 years ago, Latin America represented close to 30% of the index, Asia, 40%, and China, 1%. Today, Latin America is only 7.5% of the benchmark, Asia is 82% (up from 55% 10 years ago) and China is 42% (double its level 10 years ago).
The shift in sector weights is equally telling. Twenty years ago, Energy, Financials and Materials made up half of the benchmark. Today, Communication Services, Consumer Discretionary and Info Technology account for 50% of the index, reflecting in part the rise of Alibaba, Tencent and Meituan-Dianping, three of the top-five largest stocks in the index. They didn’t even crack the top 10 a decade ago. Holdovers Samsung and Taiwan Semiconductor round out the top five.
These moves highlight the sea change that has occurred in developing markets. Today, investing in EM equities provides access to a wide set of opportunities, from growth industries and innovative companies to fast-growing economies with younger populations and an expanding consumer-oriented middle class. Many EM economies aren’t dominated by “old-economy” names anymore—they are home to some of the world’s leading technology companies, including global leaders in e-commerce, the internet of things, artificial intelligence and video gaming.
What does this mean for investors? We believe that, after a decade of underperformance due to the strength of the dollar and U.S. market dominance, EM equities are in position to outperform, aided by continuing dollar weakness and rising commodity prices. But the biggest factor is China, which is rapidly emerging from its virus-related downturn, providing support to others in its Asian sphere. In other words, in today’s world, as the largest piece of the EM benchmark goes, so goes the EM. Clearly, this is not your parents’ emerging markets anymore.