Investing In Emerging Markets – Is It A Good Time?
By Kristal .AI, Last updated: 2022-04-18 (originally published on 2020-10-05)
Let’s start this blog with an important graph. According to a recent BCG survey, consumers in emerging markets/countries are more optimistic about their economy recovering soon (in the next 12 months) than those in mature markets. This, despite the fact that many of these emerging markets have seen severe lockdowns and have had to face the brunt of the virus derailing their economies.
The survey credits this optimism to a shift in consumer spending behavior and priorities which are expected to last beyond COVID-19.
In-home entertainment, home delivery of food and medicines, and multi-category acceleration in e-commerce are just some of the sectors that have benefited from the ‘cocooning’ behavior of residents. The survey also shows an increase in social and conversational commerce and entrepreneurs who leverage social media and the gig economy for livelihood.
The Silver Lining: Emerging Markets Are Bouncing Back
While the above graph does not negate short-term repercussions of the pandemic, the optimism in consumer spending is definitely a plus point for emerging markets. What’s even better is the fact that this optimism comes supported by some fundamental economic factors which place the EM sector on a strong footing post-lockdown.
#1. Rapid reopening: While the world many have closed down at the ‘flick of a switch’, reopening measures have not been the same everywhere. Emerging markets have had to reopen faster due to a lack of cushion to absorb the fallout from shutdowns. Now, while this may be riskier than a prolonged lockdown, it has also placed these countries on a quicker road to recovery than their counterparts in the western world.
China, for instance, has already marked up a 3.2% Y-o-Y GDP growth in the second quarter despite being the first country to go into lockdown. In effect, China has become the first country to overcome the adverse effects of the pandemic and restart economic growth – leading the way for other countries to follow suit and giving hope to the world of life beyond COVID. Compared to the economic stimulus packages doled out in the U.S. and Eurozone, China’s reform measures have been mild.
On the contrary, reports from the U.S. state that the country’s gross domestic product has “plummeted an annualized 34.8% in the second quarter”; the most since the World War era. A 35% contraction on an annual basis would mean that the American economy ended up about 10% smaller in the second quarter than in the first.
#2. The Return of Sovereign Debt: In the early stages of the COVID crisis, we saw a flight of foreign investments from the EM. However, soon enough the IMF came up with policies supporting sovereign debtors by granting numerous large rapid financing programs. The G20 bilateral debt relief agreement also gave low-income countries a new lifeline amidst the pandemic. Now, there are encouraging signs as high-yielding sovereign-debt issuers have started to return to international capital markets. Short-term risks remain, however, but the overall outlook looks positive. Analysts believe that the medium-term value proposition for EMs is now quite compelling; however, it is important nevertheless to analyze each country separately as the pandemic is following a different trajectory in different countries.
Rapid multilateral support and short-term official bilateral debt relief have also helped improve liquidity in the emerging markets which were a big concern in the initial days for foreign investors. So has enhanced dollar availability via swaps and policy responses from the central banks in these countries.
#3. Central Bank Policies: We have seen the Fed and other central banks in the developed economies cut rates aggressively. In response, the central banks in the EMs have also slashed their rates which we believe is a good strategy. As banks in developed markets court the zero, this gives EM banks some space to maneuver. A growing number of EM banks are also buying government bonds with an aim to finance growing budget deficits and temporarily ease bond market dislocations caused by uncontrolled portfolio outflows. While some would say that this blurs the line between monetary and fiscal policies, the move – if used as a temporary measure – can help in compressing risk premiums; especially in the foreign exchange market.
We have not seen much quantitative easing policies in the EM and for good reasons. Such policies would be very risky to use in emerging economies, unlike their more developed counterparts.
What does this mean for investors?
In 2000, EMs made up only 20% of the global GDP. Six years later, emerging markets counted for 38% of the global GDP. As these markets grow, they will become an important contributor to global GDP; overtaking the developed countries by 2030. It’s too early to say that the EMs will not meet this goal in the next decade and while the COVID crisis has put a temporary halt to this growth, analysts world over agree that they will probably come out of this crisis faster than other nations.
China is already the world’s second-largest economy and a manufacturing hub for most of the globe. At the end of 2016, India overtook the U.K. in terms of GDP as the latter’s economy came under uncertain headwinds fuelled by the Brexit drama.
Currently, EMs make up 85% of the world’s populace and it is this growing number that drives internal consumption in these markets. Amazon, Uber, Netflix – name the biggest brands in the market right now, and you’ll see they are all looking to capitalize on this growing consumer base to grow their business.
Technology in emerging markets is also a huge draw with cheaper smartphones, easy accessibility, and growing support infrastructure. As we saw in the BCG report, internet and e-commerce based operations are set to grow in emerging markets as they cater to a large population forced to sit at home.
For private wealth investors, this provides a huge opportunity to gain exposure to emerging markets through exclusive products, and add growth to their portfolio. China and India are two of the strongest economies in the APAC region currently, and they make good hedges as well.
If you are interested in investing in China’s growth story, you can take advantage of our emerging market ETFs which provide exposure to the region. If you are looking at investing in India, we have recently onboarded some funds which can prove to be good additions to your portfolio as well. We also held an exclusive talk with Gaurav Sharma, portfolio manager at ASK Capital Management to understand in-depth how the recent policy and regulatory changes in India have made it a better choice for investors. As India seeks to revamp its banking and agricultural sectors, and core sectors like cement and infrastructure hold strong, the opportunities for private wealth investors continue to grow.
Should you then invest in EMs?
As with every other investment opportunity, we would advise you to talk to your Relationship Manager or advisor before investing. Emerging markets can add value to your portfolio if one treads with caution and invests in companies and sectors with strong fundamentals.
The growth story in EMs has only just started. And while the pandemic has definitely caused a snafu, it isn’t the end of the road yet. As growth stagnates in the developed world, EMs can add both diversification and rewards to your investment portfolio.
Kristal.AI is a global, digital-first private wealth platform for comprehensive, no-frills wealth management solutions for sophisticated high net worth and first-time investors. Powered by an unparalleled combination of advanced algorithms and investment professionals, we focus on providing personalized products and unbiased advice. We actively embrace change to remain at the forefront of the fintech industry.
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