The Changing Face of EM

Emerging markets are on the move. Historically they have proved to be strongly cyclical with each economic cycle lasting between five to seven years. We're just at the start of the current EM cycle – one which looks set to highlight the changing face of EM. This time around the story is no longer about commodities; their sector weighting is just 14% today, compared to 30% in 2010. Instead the new buzzword is IT. With a sector weighting that has risen from 15% to 25% over the same period, the 21st century trends of mobile payment systems and autonomous driving are boosting the IT sector and moving the conversation on from the companies in the metals and mining industries that helped to boost earlier cycles.

What's new?

  • Technology is providing a major impetus
  • EMs are moving up the value chain as technology dominates over the traditional commodity drivers
  • 'Sustained by rising incomes, domestic EM demand is grabbing share from developed markets' demand
  • Increasingly, EM equities are a domestic play, fuelled by secular growth sectors

Driven by tech

Technology is transforming not just the way we live, but also the shape of our global economy. This change is strikingly apparent across the emerging markets with China leading the way.

China is capitalizing on the tech revolution. It is committed to reducing its dependence on 'widget' manufacturing and increasing the value of its production and exports by prioritizing technology. To achieve this, China turned to innovations with strong R&D spent in robotics, artificial intelligence, telecoms technology (5G) among others. Expanding online businesses, broad based digitalization and the global expansion of its internet-based businesses are also clear trends. Take mobile payments – at almost USD 12 bn China's penetration rate by volume is the highest globally by far, making companies exposed to e-commerce attractive plays. At the same time factory automation, both in China and abroad continues apace. Again, China is a clear beneficiary - 85% of the world's robotic components are produced in China.

As their economic output moves up the value chain, so the wealth of the EM populations is rising. This in turn is fuelling EM demand. And here again a shift is taking place – domestic, rather than global demand is fuelling EM growth which in turn is driving secular growth sectors. Winners include sectors such as education, healthcare, and autos, all of which reflect the changing spending patterns of the EM population.

Nowhere are these changes more apparent than in China. Take its education sector. A combination of rising incomes and the abolition of the one-child policy has seen an increasing demand for high quality private education services, with some 20 million Chinese children now enrolled in some type of private education service. This is reflected in the rapid growth of the country's after-school tutoring market which has seen spending more than double in the years between 2007 and 2015. A further doubling is expected by 2019, making education an attractive investment theme.

We firmly believe if you want to identify good investment opportunities then there is no substitute for on the ground research. We do just that. Recent visits to India and China meant we could see for ourselves the tremendous effects from digitalization and premiumization.

In our view, the EM story is a compelling one for investors. As developed markets continue to flag EMs are driving global growth – today they account for 80% of worldwide growth and China's leading the pack. With EM valuations still attractive relative to DM, there are investment opportunities to be had.