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Investor interest in emerging markets accelerates post-pandemic

By Matt Reynolds
 — 1 minute read

For those of us who can remember the 1970s, the energy crisis of that decade was a global economic and political super shock. It triggered a major global recession that persisted from 1973 to 1975 and threw the established economic and political order into chaos. 

Matt Reynolds

For many at the time, this crisis may not have felt like the end of the world, but it did feel like you could start to envisage it. 

But optimism emerged, focusing either on silver linings or efforts to consign the energy crisis to the rear-view mirror as quickly as possible. 

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The devastating social, financial and personal consequences of the COVID-19 pandemic cannot be understated and will continue to shape public and social policy across the world for some time. But in terms of investor sentiment at least, in 2021 we are perhaps experiencing some optimism. 

As the recovery progresses many investors are moving from safe-haven assets towards riskier assets, with capital flows into emerging markets increasing, helping create a favourable environment for emerging market equities, in particular. With US interest rates expected to stay lower for longer, it is possible that central banks in emerging markets could reduce interest rates further and enable cheaper financing for emerging market companies. 

These factors bode well for emerging markets, as a low-interest rate environment could drive the continued search for yield alongside a pick-up in earnings growth.

Emerging markets today consist of more than 60 countries with varying fundamentals, different economic growth patterns and often widely diverging company valuations. 

While emerging markets have developed, they still constitute only 12 per cent of the global equity market. Yet emerging markets are the key drivers of global growth, accounting for a significant share of the world’s GDP and global growth.

But where it gets particularly interesting is at the company level. Select global companies derive a large amount of their revenues from emerging markets. In fact, revenue contributions from emerging markets have been growing for some companies, outpacing revenue growth from developed markets in which they operate. 

As the chart below shows, over the 10-year period 2009-19, revenues from emerging market economies for big global companies, LVMH, Thermo Fisher and Mastercard outstripped revenues from the developed market economies in which they operate. 

This perhaps illustrates the growing power of the consumer in emerging markets as populations in these countries continue to urbanise and their middle classes inflate. 

The growing importance of emerging markets to companies’ top lines

Clearly, the growth potential of emerging markets appears bright. But if investment history of the past century has taught us anything, it is that it can come with volatility. 

So how can investors today take exposure to these fast-growing markets without adding significant risks to their overall portfolio? 

Every client has a different governance structure, set of resources and appetite for emerging markets in the portfolio. One way is to have dedicated strategies that are run by multiple portfolio managers with complementary styles, helping enhance the diversification of investments while limiting the risk associated with isolated decision-making. In turn, this reduces the volatility of the overall emerging market strategy. 

Under a multi-asset category, an emerging market equities and debt blended approach can provide portfolio managers with the flexibility to invest in the broadest opportunity set within emerging markets and take advantage of their inherent diversity. This approach also allows for the greatest diversification within an emerging market strategy and helps limit volatility.

Meanwhile, a strategy with the flexibility to invest in both developed market equities with revenue from emerging markets as well as emerging market equities themselves, broadens the opportunity set for investors to gain access to areas of growth that are under-represented in the traditional emerging market indices. This approach maximises the growth potential of the emerging market universe and allows access to a range of industries and companies beyond those domiciled in emerging markets. The flexibility to invest in developed market companies allows the strategy to access the liquidity and depth of these more mature markets, qualities that are sometimes lacking in emerging markets.

Today, our job as investment managers is exactly the same as almost 35 years ago when the World Bank invited Capital Group to create the world’s first emerging market equity portfolio. Find the companies with strong and growing emerging market revenue exposures, buy them at reasonable prices and hold them so that any returns generated may be better than taking a blanket exposure and buying all companies. That’s the value-add of active investing in any market – emerging or developed.

Matt Reynolds is the Australian investment director for Capital Group 

Disclaimer

The information provided is neither an offer nor a solicitation to buy or sell any securities or to provide any investment service. Statements attributed to an individual represent the opinions of that individual as of the date published and may not necessarily reflect the view of Capital Group or its affiliates. 

While Capital Group uses reasonable efforts to obtain information from third-party sources which it believes to be reliable, Capital Group makes no representation or warranty as to the accuracy, reliability or completeness of the information. 

The information provided is of a general nature and does not take into account your objectives, financial situation or needs. Before acting on any of the information you should consider its appropriateness, having regard to your own objectives, financial situation and needs.

This communication has been prepared by Capital International, Inc., a member of Capital Group, a company incorporated in California, US. The liability of members is limited. In Australia, this communication is issued by Capital Group Investment Management Limited (ACN 164 174 501 AFSL No. 443 118), a member of Capital Group, located at Level 18, 56 Pitt Street, Sydney NSW 2000 Australia. 

All Capital Group trademarks are owned by The Capital Group Companies, Inc. or an affiliated company in the US, Australia and other countries. All other company and product names mentioned are the trademarks or registered trademarks of their respective companies. 

© 2021 Capital Group. All rights reserved.

 

Investor interest in emerging markets accelerates post-pandemic
Matt Reynolds
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