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emerging markets

Emerging Markets Investing

The first thing to understand about emerging markets is that they are not necessarily emerging. The term itself was coined by an economist at the World Bank in the early 1980s. The main factor that delineates an emerging market from a developed one is the level of income per capita (GDP/population), which is neither a measure of progress nor an indicator of future growth.  Index providers have added other elements to their determination of what constitutes an emerging market. They include measures of market size and liquidity, as well as judgments of the strength of legal and regulatory frameworks.

A second important consideration is simply awareness that emerging markets are not all alike. Rather, it is a disparate group of countries in terms of their development stages, political and economic systems, and geographic distribution. This can potentially create notable return dispersion — by country, sector, and company — within the emerging markets category. 

Learn More About Emerging Markets From Our Global Market Strategist

Ongoing trade tensions. Uncertain global growth prospects. Inefficient equity markets. Swelling middle classes. Richard “Crit” Thomas examines forces and factors impacting emerging markets and shares insights into what he views as the risks and opportunities.

emerging markets map

What Countries Are Considered Emerging Markets?

The MSCI Emerging Market Index currently includes 26 countries. They are Argentina, Brazil, Chile, China, Colombia, Czech Republic, Eqypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Qatar, Russia, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates. 

This index tracks the market capitalization (translated into U.S. Dollars) of every company (that meets liquidity and investability requirements) listed on the countries' stock markets.

Investing in Emerging Markets

Since the beginning of the 21st century, the emerging market story has revolved around China. In 2000, China’s weight in the MSCI Emerging Market Index was just 0.5%. Today, it represents almost 30%. China’s rapid industrialization and urbanization kicked off a commodity super-cycle. Many resource-rich emerging markets benefited along with China’s rise. Like Japan in the 1960s and 1970s, China became the low-cost factory to the world. An export boom ensued. Arbitraging low labor costs, Asian manufacturers sold everything from cars to clothes to American and European consumers binging on expanding credit. China’s industrialization also lifted a massive wave of people out of poverty and into the middle class as urban jobs replaced agricultural ones. The number of people advancing into the middle class continues to increase. The Brookings Institution estimates that for each of the next five years, 160 million people will join the global middle glass, dominated by the Asia Pacific Region. The main emerging markets powerhouses are China and India. Together, the two comprise 40% of the world's labor force and population. It is projected that by 2050, 50% of all middle class consumption will come from China and India. In any discussion of emerging markets, it is important to consider the powerful influence of these two super-giants.

Looking Ahead to the Future of Emerging Markets 

Surveying the investment horizon, we believe the next round of growth for the emerging markets as a whole will be more complex. We think the easy growth path for China is over, as some of its low-cost manufacturing is offshored to nearby neighbors. That said, there will be winners and losers created within the index with plenty of opportunity for growth amid new secular, not cyclical, trends. Consider adopting an active management approach when constructing an Emerging Markets portfolio. Evaluate prospects for sectors and industries that are more directly influenced by the burgeoning middle class. We believe they will provide higher and more sustainable growth. 

So, Where Is the Growth? 

The index is in transition, too. 

MCSI Emerging Markets Index
June 2008 - June 2019

emerging markets index

Source: MSCI

The tailwinds supporting Emerging Markets growth in the early- to mid-2000s subsided with the financial crisis. Now, more than a decade later, distinct new trends have emerged. Look for increasing opportunity for high-quality growth businesses benefiting from local demand growth, rather than the export-driven business models that prevailed in the past. Consumption growth in Emerging Markets has already surpassed that of developed markets. We believe it should rise further, based on the following:

  • Increasing productivity
  • Growing discretionary incomes
  • Expanding credit penetration
  • Attractive demographic profiles

Innovation & Disruption in Emerging Markets 

We believe that rising forces for innovation and disruption will create new growth industries and allow a select few businesses to leapfrog their developed market peers. Bear in mind, because emerging markets are not a homogeneous asset class, not all emerging markets are equally sound investments. Of the multiple trends, we find that three are particularly compelling:
internet connectivity mobile device penetration emerging markets

Internet Connectivity & Mobile Device Penetration

Rising internet connectivity and mobile device penetration are spurring broad-based economic activity in emerging markets. This has the potential to bring significant innovation to areas including retail, advertising, travel and financial services.
consolidated operators emerging markets

Consolidated Operators

The shift from fragmented industries to consolidated operators also offers opportunities in emerging markets. In many countries, informal “mom and pop” shops, local outdoor markets and street carts are common vendors for everyday goods. Formal competitors have the opportunity to take share and consolidate the market, particularly as consumer incomes rise and demand increases for better quality and greater selection. 
infrastructure investments development emerging markets

Infrastructure Investment & Development

Substantial infrastructure investment and development are required to enhance productivity and stimulate demand. We see opportunities in both “hard infrastructure,” such as new roads, port sand airports, as well as, “soft infrastructure,” including increased healthcare access, financial inclusion of the previously unbanked population and better education.

Emerging Markets Index in Transition

Consumption-oriented sectors have led the pack in the last few years. 

MSCI Emerging Markets Index
Change in Sector Weights 2012 - 2018

change in sector weights 

Source: Bloomberg; sectors based on Industry Classification Benchmark (ICB)

Expanding Opportunity Set

As secular trends multiply the opportunities in emerging markets, we believe this growth is more broadly expanding the universe of high-quality growth businesses and gradually changing the nature of emerging market stock markets. We expect these markets to shift toward services and consumption, similar to the shift that occurred in the U.S. over the past 30 years. In the U.S., the sectors that we most often associate with faster-growing and more innovative businesses — Consumer, Health Care and Information Technology — grew at the expense of slower growing sectors, including Industrials and Utilities.

Keep in mind that there will be winners and losers with emerging markets. Given evolving new secular, rather than cyclical, trends, an active approach may consider those that are more directly influenced by the burgeoning middle class. We believe that understanding the business models — and how they adapt to local nuances — stands to be a critical component to pursuing investment success in these dynamic business spaces. 

Explore Touchstone's Actively Managed Emerging Markets Fund

Sands Capital Emerging Markets Growth Fund

Actively managed and sub-advised by Sands Capital Management, LLC, this fund seeks long-term capital appreciation by investing primarily in companies located in emerging market countries and in frontier market countries. 

Related Viewpoints

The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used to create indices or financial products.This report is not approved or produced by MSCI.  The index mentioned is an unmanaged statistical composite of stock market performance. Investing in an index is not possible. 
 
Investing in Equities, including International, Emerging and Frontier Market equities are subject to market volatility and loss. They also carry the associated risks of economic and political instability, market liquidity, currency volatility and differences in accounting standards. The risks associated with investing in international markets are magnified in emerging markets and frontier markets.  

Please consider the investment objectives, risks, charges and expenses of the fund carefully before investing. The prospectus and the summary prospectus contain this and other information about the Fund. To obtain a prospectus or a summary prospectus, contact your financial advisor or download and/or request one on the resources section or call Touchstone at 800-638-8194. Please read the prospectus and/or summary prospectus carefully before investing.


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