Emerging markets look set to benefit from a number of positive trends over the next decade. Trends that we believe our investment process can exploit.
1. Peak globalisation and EM decoupling. We believe we have reached the peak of globalisation. A combination of demographic change, politics, culture and technology have brought about change in how the world interacts. This will result in a world that is less dominated by the US and with a more independent stance from Asia, Europe, LatAm and Africa. We see this as a net positive for investing into emerging markets (EMs) as we believe this will create more value at a company level. Emerging markets will increasingly be a stock-picker’s environment and less about GDP growth. We see the next 10 years as the ’Asian decade’, driven by demographics and technology. Peak globalisation could also mean peak margins for US companies with Asian companies having room to grow their margins. Given the valuation differential between Asian and US stocks, this provides a good case for Asian equities.
2. Demographic changes. There are three key demographic trends that will affect economies: improvements in life expectancy will see an older society; every second, five new people will enter the middle class in emerging markets; and, the interests of and trends set by Generation Zrs will be a bigger influence than those the millennials. These trends provide a positive influence for e-commerce and internet services in EMs, as well as in healthcare where we are finding some interesting opportunities.
3. Technology. The next decade is set for a new growth cycle in technology, led by 5G. Development trends in semiconductors, chip design and software solutions will create innovative new products and services and we are upbeat on the prospects for EMs within the technology space. There are significant ways in countries like South Korea, Taiwan, Japan and China to gain exposure to these emerging opportunities. The rise of AI and automation will affect the global supply chain with manufacturing looking very different when we reach 2030.
4. Electrification. Improvements in battery technology alongside cost reductions from scale and investment should result in an increased take-up of electric vehicles.
5. Urbanisation and smart cities. The urbanisation trend within emerging countries such as India looks set to continue and expand. This is a positive trend as it can result in an improved labour market and service economy. Cities which have recently urbanised could well become smart cities in terms of their infrastructure. China’s Pearl River Delta evolution is a good example.
6. The end of negative yields. We have seen the extreme development – even looking at global economic history – of a huge amount of debt in the developed world carrying a negative yield, all from the combination of a savings glut, disinflationary forces from technology and global manufacturing, excess capacity and extreme monetary policies created around $16trn of negative yielding fixed income instruments at the peak period of late 2018 into 2019. We believe a combination of asset allocation and a new political agenda for monetary and fiscal policy will lead to less debt being issued at negative yields and less distortion in terms of pricing signals to the market.
7. Monetarism and QE. Monetarism and quantitative easing will play a lesser role and old-style Keynesian economics will become more important. Taxes will likely rise. We believe future economic stimulus will come in a more co-ordinated form between monetary and fiscal policy. The big change will be MMT (Modern Monetary Theory), with the leader here likely to be Europe that will use the central bank to underwrite funding of climate change projects. This is an extreme view, but one we will not rule out. We have a situation now in Europe where one of the largest political advocates for using monetary policy to fund political projects is now head of the European Central Bank (ECB). One of Christine Lagarde’s first demands is to have climate change policy as part of the ECB agenda, therefore do not be surprised if we do not get a hawkish ECB going forward and instead have a central bank that will be very active in implementing climate change policy. We also believe that taxes will go up globally. Governments’ futures costs will grow quickly over the next decade and there is only one place to get the funding.
8. Climate change will take centre stage politically. As mentioned above, we believe climate change policy will be high on the political agenda – and rightly so. It will be important to get China and India on board as this is a global problem that needs global solutions. In our opinion, the solutions will come from technology and significant changes in consumer habits (such as eating less meat) which the younger generations will be much more adaptable to.
Climate change policy will be high on the political agenda – and rightly so. It will be important to get China and India on board as this is a global problem that needs global solutions.
9. Women will play a bigger role in society. An increasingly important role for women in the economy will be a very strong force going forwards, both at the micro (corporate) and macroeconomic (country) level. Women are, as we see it, hugely underutilised and the companies and nations that best deploy them will perform significantly better. In an EM context, we see the fastest pace of change for the gender gap in Asia. We see the biggest risk to Middle East and Africa, resulting in underperforming economic growth.
10. Fair redistribution as a stronger trend. We do not see capitalism going away. We need a private sector to allocate capital and it will always want a return on its investments. However, we see a much stronger focus on the overall stakeholder environment and its implication for how business is conducted, with the aim of making business more sustainable, providing benefits to all stakeholders, including shareholders. This is, of course, a positive development and is at the heart of our own investment philosophy and process. It is precisely how companies can enhance growth opportunities and reduce risk and thereby expand the total EVA (Economic Value Added) over the lifespan of the business. We believe this new version of a more moral capitalist agenda will develop into stronger corporate visions and strategies and will also lead to a larger part of society benefiting. We also see more partnerships emerging, including those between the public and private sector. We also see a fairer distribution of wealth created via tax structures, salary pressure in key industries and renumeration programs going deeper into organisations. We believe our focus on the real integration of sustainability, including material ESG Issues, will be good at spotting the companies that can benefit from a broader stakeholder approach.
Economies and markets move at a rapid pace and what we predict now might change very quickly. However, these 10 issues are the ones we think about when looking to invest in emerging market stocks. Some provide a potentially positive effect on share prices; some are potential risks. In either case, we believe our investment process can help us find the best sustainable opportunities in emerging markets, which we can hopefully deliver to you, as investors.