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Take advantage of shifting global dynamics
Emerging markets (EM) have been growing rapidly in recent years. In fact, emerging markets and developing economies now contribute over 50% of global growth and are expected to contribute over 60% by 2025.1 Having gone from a peripheral position in the world economy once dominated by agriculture and cheap manufacturing, emerging market countries are today home to some of the world’s fastest-growing economies and most innovative companies.
Despite this, they still account for just a fraction of most Australian investment portfolios and are under-represented in most global indices.
The opportunities, and risks, are as diverse and complex as the region itself, so investing with an active manager, with the resources to research and select quality stocks within this opportunity set, is paramount.
What are emerging markets?
An emerging market economy is simply one transitioning from low-to-middle income to high income. However, unlike a frontier economy, an emerging market economy already shares some of the characteristics of a developed market. This includes a functioning stock exchange where shares can be easily traded, access to debt and some form of predictable government regulation – all of which help smooth its path to development.
Emerging markets are home to geographies as diverse as a high-income Korea to a low-income Indonesia, from large domestic economies such as China, to an export-dependent Taiwan and from commodity exporters such as Saudi Arabia to importers such as India.
Amit Goel,
Portfolio Manager, Fidelity Global Emerging Markets Fund
Emerging markets are the growth powerhouse globally
Since 2010, emerging economies have had an output that is slightly larger than that of the developed world. In 2025, its estimated their contribution will grow to 60% (Figure 1).
Figure 1. EM is a significant contributor to global GDP, yet is under-represented in global indices.
Source: World Economic Outlook (April 2023) – GDP based on PPP, share of world (imf.org).
If you’re wondering why emerging markets are experiencing such solid growth, you need to look under the hood to the profound demographic shifts occurring in this region.
A demographic shift with more workers and rise of the middle class
Quite simply, emerging markets account for 70% of the world’s population, and half its land mass. It’s simply too big to ignore. The low-hanging fruit of moving large populations
from rural subsistence to urban consumption may have been harvested, but the transition from low to middle and higher incomes is ongoing, with enormous opportunities in sectors that target that growing middle class, such as consumer finance, for example.
China’s transition to a middle-class country is not yet complete. It will continue adding significant numbers until 2027, when an estimated 1.2 billion Chinese will be in the middle class (one-quarter of the global total).2 With this increased affluence comes more consumption – not just of consumer goods such as cars, technology and electrical goods, but of more sophisticated products and services such as digital payments as more people own mobile phones.
More recently, the rise of the growing digital economy and persistent technological advancement have been increasingly important drivers of emerging markets. China, which was traditionally the powerhouse of global manufacturing for decades, today rides the wave of digital innovation with the success of the BAT tech giants – Baidu, Ali Baba and Tencent.
These Chinese companies rose above the status of copycats long ago and are taking innovative and different paths to those of their American competitors. Additionally, some of the largest e-commerce, gaming, social media and hardware manufacturers reside in emerging markets and the changing nature of the index shows just how much this changed over a decade.
A younger population
While much of the developed world struggles to come to terms with the cost of supporting an ageing population, developing economies typically don’t have this problem, as much of their population is still young. For example, India’s population has a median age of 28 years, compared to Europe’s median of 43, which means there are still plenty of productive workers to keep the economy running, and fewer retirement-age workers to support.3
Figure 2. Median age
Source: Worldometers.info/world-population
As more of these young populations find meaningful work, they also tend to have more disposable income, thus perpetuating the growing middle class in emerging market economies.
A more broad-based index composition
Today, encompassing 24 countries spanning five regions, the MSCI Emerging Markets universe captures more than 1,300 large- and mid-cap securities. The region has many exciting and innovative companies in which to invest.
Since 1999, we have seen a reduction in energy and materials in favour of financials, consumer discretionary and information technology names. This translates in a less cyclical earning stream and a more diversified investment universe.
Figure 3. MSCI Emerging Markets Index composition
Source: Fidelity International, Factset and MSCI Emerging Markets Index, as at May 2023
Why emerging markets; why now?
There are a number of reasons why we believe there is a strong case for investing in emerging markets. Post-Covid, there have been shifts in the global supply chain, along with ongoing geopolitical tension, which is driving a more regional approach to trade. Emerging market economies with large domestic consumption are expected to benefit.
We expect to see the rise of regional economic centres, where growing demand from a large economy like China or India fuels growth in other developing countries nearby. Today, close to half of mainland China’s exports were delivered to fellow Asian countries while 20.7% were sold to importers in Europe.4
While the re-opening of China has been bumpy, we believe this region offers exciting opportunities for the active manager, particularly compared to developed markets such as the US and Europe, where many are predicting recessions.
Bank Central Asia: Invest in the bank that’s financing Indonesia’s growing middle class
Bank Central Asia (BCA) is Indonesia’s largest bank by market value, with a market capitalisation of approximately US$67 billion.* As South East Asia’s largest lender, it is set to benefit from increasing levels of credit penetration and expanding mortgage market in the region.
BCA has a long heritage. Founded in 1955, its real success came after the 1988 Asian financial crisis, when BCA re-invented itself with a change
of ownership and a renewed focus on employee and customer engagement.
The bank has established itself at the forefront of Indonesia’s financial services market, servicing both individuals and businesses. With the same management team in place for almost two decades, it offers a diverse range of loan and deposit products in much the same way as Australia’s ‘big four’ banks. With the Indonesian economy expected to continue to expand overthe coming years, BCA is expected to provide much of the private financing that will fuel the country’s development.
*Bloomberg, as at 20 March 2023.
