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Emerging markets no longer only for the brave
Some time ago, investing in emerging market companies was not for the faint of heart. Sector exposures were very biased towards manufacturing and agriculture, while the economies these companies operated in were immature and often had structural issues. What’s more, investors brave enough to commit funds to emerging markets had to be prepared for things like currency collapses, debt defaults and double-digit inflation rates that constrained growth and restricted external investment.
Twenty years on, emerging markets have changed for the better. These economies are now amongst the key drivers of global growth and, in aggregate, carry less risk than they used to (but still higher risk than developed markets). Emerging markets are home to some of the world’s most innovative companies, and a wealth of investment opportunities.
Here’s seven reasons to add emerging markets exposure to your portfolio:
1. Emerging markets have “emerged”
The chart below shows that emerging and developing economies now account for 59% of the world’s Gross Domestic Product (GDP), and this remains on an upward trend. Meanwhile, the advanced economies’ share of global GDP has dropped to 40% and is forecast to continue to decline.
As a result, investors now look differently at emerging markets and the long-term investment opportunities they represent.
Emerging markets taking over the world (% of world GDP)
Source: International Monetary Fund as of 20 February 2018. The dashed lines indicate the figures are estimates.
2. Growth advantage driven by strong secular trends
Emerging markets are at the forefront of economic growth, generating the highest rates of real GDP growth globally. This reflects several long-term secular trends that are forecast to continue:
- Large, increasingly affluent populations – As of 2017, emerging markets were home to approximately six billion people, around 87% of the world’s population1.
- Favourable demographics – Many emerging market countries have young, growing and increasingly well-educated workforces, along with a fast-growing middle-class. While most developed nations are ageing, roughly 90% of the world’s population under 30 years of age live in emerging markets1.
- Increasing urbanisation – The continued growth of the urban middle class – driven by migration from rural economies – further underpins productivity gains and drives future consumption growth.
- Disruptive technologies and innovation – Not only do emerging markets have the labour pool advantage, they are also poised to capitalise on productivity growth thanks to advancing technology. Emerging market citizens are harnessing technology faster and more enthusiastically than many of their developed-market peers. Whether it is in e-commerce, fintech, big data, artificial intelligence (AI) or gaming, emerging markets are amongst the leaders of global innovation.
3. Access to global leaders in technology and innovation
Emerging markets are at the forefront of the global technology revolution. Many emerging market tech companies – such as Samsung, TSMC and Tencent – are among the most innovative and fastest-growing in the world, driven by young, increasingly affluent and tech-savvy populations. The share of information technology stocks in the benchmark MSCI Emerging Markets Index has more than doubled since the turn of the decade and now has the largest technology weighting of any major global index.
With Australia representing only 2% of global share market capitalisation2, the vast majority of equity investment opportunities lie offshore where companies are typically bigger, sectors are broader, and many economies are experiencing rapid development. Emerging market exposure can enhance portfolio diversification and provide access to sectors not well represented in the Australian sharemarket.
5. Exposure to different stages of the economic cycle
Developed economies often experience quite synchronised growth. In contrast, emerging markets are so diverse in nature that they can offer exposure to different stages of the economic cycle at the same time. For example, both Russia and Brazil are currently coming out of recession and should experience stronger growth in coming years, whereas South Africa is further behind and not yet showing clear signs of recovery. This growth divergence can help create distinct and less correlated investment opportunities for active investment managers.
6. Attractive valuations relative to developed markets
The charts below show that while both developed and emerging markets have around the same Return on Equity, the current valuation of emerging markets, as measured by the Price to Book ratio, is much more attractive than that on offer in developed markets. All other things being equal, this effectively means that you can access the same type of growth opportunity at a lower entry price.
Source: Martin Currie
This is partly due to the impact of quantitative easing and asset inflation in developed markets in recent years. Expansionary policies have increased company valuations relative to profitability in developed markets, making emerging markets appear better value on a long-term view.
7. Investing in emerging markets just got easier
The BetaShares Legg Mason Emerging Markets Fund (managed fund) (ASX: EMMG) is an Active Exchange Traded Fund (Active ETF) that is now available via one simple trade on the ASX, just like any share.
The Fund is actively managed by global equity specialist, Martin Currie, and aims to deliver capital growth for investors who are looking to access the compelling long-term growth themes evident in emerging markets, through a portfolio of 40-60 companies diversified across markets and sectors.
EMMG’s fund uses the same investment strategy as the award-winning Legg Mason Martin Currie Emerging Markets Fund, which, as the table below indicates, has significantly outperformed its benchmark over the long term.
Performance of Comparable Unlisted Fund: 31 April 2019
There are risks associated with an investment in the Fund, including market risk, emerging markets risk, currency risk and market making risk. For more information about risks and other features of the Fund, please see the Product Disclosure Statement.
1. Source: UN data as quoted in Forbes, 1 August 2018.
2. As measured by Australia’s weight in the MSCI World Index as at Feb 2019.
Past performance is not an indicator of future performance. This article has been prepared by Legg Mason Asset Management Australia Ltd (ABN 76 004 835 849 AFSL 240827) (Legg Mason Australia). BetaShares Capital Ltd (ABN 78 139 566 868 AFSL 341181) (BetaShares) is the issuer and responsible entity of the BetaShares Legg Mason Emerging Markets Fund (managed fund) (ARSN 629 322 247) (Fund). BetaShares has appointed Legg Mason Australia as investment manager for the Fund. Legg Mason Australia is part of the Global Legg Mason Inc. group. Martin Currie Investment Management Limited, an affiliate of Legg Mason Australia, provides the investment management services for the Fund. Before making an investment decision you should read the Product Disclosure Statement (PDS) for the Fund carefully and consider, with or without the assistance of a financial advisor, whether such an investment is appropriate in light of your particular investment needs, objectives and financial circumstances. The PDS is available and can be obtained by contacting BetaShares on 1300 487 577 or Legg Mason Australia on 1800 679 541 or at www.betashares.com.au or www.leggmason.com.au. This information does not take into account the investment objectives, financial objectives or particular needs of any particular person. Neither BetaShares, Legg Mason Australia, nor any of their related parties guarantees any performance or the return of capital invested. Past performance is not necessarily indicative of future performance. Investments are subject to risks, including, but not limited to, possible delays in payments and loss of income or capital invested.