Finding sustainability in emerging markets.

Emerging markets represent the majority of the global population and their people are shaping their own destiny.

A majority of the world’s population lives in emerging markets. A well-mapped process for lifting poor economies into middle income ones, has recently delivered annually more new wealth and demand, in absolute terms, than at any other time in history.

Yet still, it is at an early stage. We see decades of growth ahead for companies able to serve large and diverse populations in countries such as China, India and Brazil.

Investments into the future of these countries are generating significant benefits. So why do emerging markets represent only a fraction of the allocation of investor portfolios?

Millions of new middle-income consumers want to live to the max

Incomes in emerging markets are well below those of the developed markets of Europe, the U.S., and Japan. But the people in emerging markets are working hard to close the gap. The sheer population size of these markets creates massive new demand with spending growth that should last not only for years, but also for decades.

Demand starts with simple staples such as toothpaste and shampoo replacing traditional cleaning practices, but is quickly moving up the value chain to electricity, smart phones, healthcare, and credit – alongside the desire for better education and societal stability. The roadmap to prosperity is now in place and structural shifts are driving change.

 

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The result of these structural growth drivers is that larger emerging markets can grow quicker than developed markets, while importantly, their debt still remains at sensible levels relative to their ability to pay.

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What is an emerging market?

What unites people across emerging markets is their striving for a brighter future, a higher standard of living, and a place at the world’s table. For the first time, for millions of families, it is within their grasp.

A small proportion of the world’s population live in the wealthy developed markets. Emerging market countries cover a broad range – from relatively wealthy countries such as South Korea to earlier stage markets such as Nigeria. An effective path towards economic development was blazed by the Asian Tigers (Hong Kong, Singapore, Taiwan, and South Korea) after the Second World War. This road map has provided lessons that have helped bring better lives to literally hundreds of millions of people over the past 20 years.

There are still significant income and consumption gaps between developed and much of the emerging markets. The Asian Tigers road map showed how important private enterprise is in delivering goods, services, and infrastructure suited to the tastes and needs of local populations, creating jobs, and in turn generating new consumer demand.

These developments need capital to finance their growth and development. For investors there is a significant opportunity to bridge emerging market demand for capital and the need for long-term investment returns.

Our investment teams search the world looking to invest into governments, businesses, and management teams with the potential to deliver economic growth and market leading goods and services to ever wealthier and confident customers across the emerging markets. These growth fundamentals are quite different to many found within the mature developed markets, which offers opportunities to diversify the portfolio.

Active, bottom-up equity investment strategies

Emerging markets offer significant long-term potential for investors. However, as a result of their earlier stage development and smaller domestic capital markets they are often more volatile than the developed markets. While this can make investors nervous, it also brings opportunities to experienced active investment managers. Our investment teams all employ investment philosophies based on fundamentals that are executed through bottom-up stock selection. 

This approach helps to participate in both the growth opportunities and sentiment driven volatility so often seen in emerging markets.

 

Insights

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Emerging markets: focus on stocks, not the market, as you enter the fourth quarter

The US-Chinese trade conflict has become a global worry, but the issue is sometimes blown out of proportion. While emerging-market investors take cover from trans-Pacific gales and local Asian thunderstorms, we stay the course. As stock pickers, we suggest three “gos”: go domestic, go stock-specific, and go cheap.

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