Over the last 20 years, the economic engine of global growth has shifted profoundly from the U.S. and Europe to emerging markets led by China and India. In the span of just two decades, bilateral trade between developed and emerging market countries has grown to 47% of all global trade1 and, by 2050, it is predicted that six of the seven largest economies in the world will be today's emerging ones, with China, India and Indonesia leading the way.2
A significant outcome of this trend has been the hundreds of millions of people who've been lifted out of poverty and turned into consumers, presenting opportunities for existing companies to grow in new markets and for new companies in these regions to emerge.
For investors, emerging markets have also transformed their portfolios, broadening the typical equity allocation and adding a new source of growth relative to developed market stocks. While there are a lot of reasons to get excited about the potential for emerging markets, there are a few themes we're focused on right now:
Favourable demographics pays dividends
Developed market countries like Canada are getting older by the day—according to Statistics Canada, seniors will account for more than 25% of the Canadian population by 2063. As policymakers in North America and Europe grapple with the impact of an aging population on social services and the economy, emerging markets are benefiting from an opposite trend—not only are they younger, a greater share of the population is moving into the workforce, earning money, growing their disposable income, and saving.
People in countries like China and India are joining the middle class in droves and, as that's happened, fertility rates have dropped, meaning more people are finding themselves unburdened by child and/or elder care and are able to stay in the workforce.
We call this a “demographic dividend" that will continue to power emerging market growth into the future.
Rising incomes means more disposable income
People aren't just working more—they're also earning more. As globalization has flourished, it's brought new sources of income that can be used to buy things like cars, clothes, and technology.
The large, populous cities of China are a great example of how this trend is playing out. The per capita income in Beijing, with a population of over 20 million, has tripled from around US$3,000 in 2000 to an estimated US$21,000 in 2018.3 It's a similar story in Shanghai with its 24 million citizens. The dramatic growth in Chinese income, combined with the scale of its large population, magnifies just how influential the country has become in bringing vast numbers of new consumers into the global middle class.
Finding gems with a bottom-up approach
While economic growth in these countries has powered forward based on favourable demographics and a rising middle class, the experience has been mixed for investors. Finding investment success in these regions requires identifying undervalued, quality emerging market stocks with strong fundamentals that are poised to capitalize on these consumer trends.
Our MDPIM Emerging Markets Equity Pool is invested directly in emerging market companies and a specific portion is dedicated to capturing the secular trend in emerging market consumption.
Here are a few trends we are invested in today:
High demand consumer products
As more people earn more money, they're looking for places to spend it. The most recent Singles Day in China exemplifies this newfound spending power. A Chinese holiday that falls on November 11 (the date is significant: 1-1-1-1), Singles Day was started by Alibaba founder Jack Ma in 2009 to encourage single people to purchase themselves gifts through his company, which is now the largest e-commerce platform in China, akin to Amazon in North America.
On the most recent Singles Day, US$38 billion in merchandise was sold on Alibaba (in one day!), representing 25% growth in sales year-over-year.4 Singles Day has become such an event that Taylor Swift joined in on the celebrity-filled festivities and performed in Shanghai, live streamed on Alibaba's own Youku video streaming service.
Alibaba, the most valuable emerging market company (with a market capitalization of US$460 billion), is a holding in the MDPIM Emerging Markets Equity Pool, as well as MD Growth Investments Ltd. and MD Fossil Fuel Free Equity Fund.
Additionally, there are large developed market-based companies that are making inroads with emerging markets consumers. At companies like Nestle and Unilever, roughly 40% of sales are coming from emerging markets.5 Both have been successful with strategies targeting consumers in regions where they've developed flavour profiles and marketing practices focused on local tastes and trends.
Growth in emerging markets is much higher than in developed markets: during the first three quarters of 2019, Nestle reported organic sales growth of 3.7% (developed markets at 2.7% while emerging markets grew at 5.0%).5 Emerging markets consumers are now a major profit centre for this Swiss multinational.
Travel and tourism growth
Emerging markets consumers are now going out to travel the world. Over 160 million Chinese nationals travel abroad every year, spending US$260 billion along the way. To benefit from this trend, the MDPIM Emerging Markets Equity Pool has a stake in Airports of Thailand PCL. Thailand has been a big beneficiary of emerging market tourism with its location between powerhouse economies, China and India. According to our subadvisor partners Grantham, Mayo & van Otterloo (GMO), it's seen 8.2% compound growth in tourist arrivals, with 38 million tourists arriving in a country of 69 million people.
The need for financial services
Financial services are on the rise in emerging markets as more people gain access to banking services and insurance products. While developed market financial service companies are already fully entrenched in their home markets, there is ample room for growth among emerging market regions where the number of people with one or more bank accounts is much lower.
There are regional differences in this sector, however. Countries like India, the Philippines, and Indonesia are excellent examples of places where simple banking services are on the rise. Demand for insurance products tends to be in higher income regions like China and South Korea where people are also saving for retirement. We have holdings in Ping An Insurance and AIA Group, two higher quality private insurers with room to grow.
To find out how emerging market equities can benefit your portfolio, please contact your MD Advisor.
3 China National Bureau of Statistics via Bloomberg
* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec).
MD Fossil Fuel Free Funds™ is a trademark of The Bank of Nova Scotia, used under licence.
About the AuthorMore Content by Mark Fairbairn