Climate change is likely to impact lower-income countries the most, while emerging markets are also home to the world’s richest biodiversity. (UBS)

Emerging markets benefit more from structural drivers like younger demographics than developed markets, especially as the rural-to-urban migration is gathering pace, with 68% of people expected to live in urban areas by 2050 compared to 2018, according to the UN World Urbanization Prospects 2018 report.

As we discussed in the February Sustainable Investing Perspectives , companies which are leaders on managing sustainability topics (i.e., ESG leaders) are supported by the same broad tailwinds, but they also benefit from an accelerating sustainability regulatory environment across markets from China to South Africa to Chile. ESG leader EM strategies have outperformed their traditional counterpart MSCI Emerging Markets Index, and currently have favorable valuations.

Beyond fundamental reasons and a focus on ESG leaders, we also see opportunities in longer-term themes tied to emerging markets that can advance sustainability objectives.

Climate change is likely to impact lower-income countries the most, while emerging markets are also home to the world’s richest biodiversity. Given increasing risks, incentives for public and private market investors to increase spending in sustainable infrastructure in EMs are significant. We expect a focus on climate adaptation and mitigation infrastructure to accelerate, and evidence is accumulating. A case in point: in January, India and the UAE signed a memorandum of understanding on green hydrogen development in India. Partially due to our current preference for EMs, the EM infrastructure theme is also screening as a top five theme for this month.

Despite some EM regions experiencing a demographic dividend, aging is still a relevant factor for EMs too. The over-65 population will grow twice as fast as that in developed markets in the next 30 years, according to UN estimates; this highlights the need for healthcare investment. In aggregate, EM countries spent 5.2% of their 2019 GDP in healthcare, considerably below the OECD average of 12.5, according to UN data. These two trends, combined with a need to improve health outcomes as EM countries become more prosperous, point to fundamental longer-term opportunities in the Emerging Market healthcare theme.

Investor takeaways:

  • We think that emerging markets present both tactical and longer-term investment opportunities. ESG leader EM strategies benefit from the same tailwinds, as well as accelerating regulations which will benefit those companies better at managing risks and opportunities.
  • Climate change is likely to impact EMs the most, making investment in resilient infrastructure important. We see evidence of increased spending from governments in these areas, and believe that Emerging market infrastructure investments will benefit from this trend.
  • The Emerging market healthcare theme presents longer-term investment opportunities as we expect healthcare spending to increase over time in emerging markets with increased prosperity, aging populations, and a focus on sustainable development.

Main contributor: Amantia Muhedini

Read the full report Sustainable Investing Perspectives: Emerging markets, most ambitious emission standards yet, proxy season kick-off 8 May 2023.

This content is a product of the UBS Chief Investment Office.