Getting Started in Emerging Markets

Our Interactive Journey into Emerging Markets was designed to highlight the potential of these exciting markets. Global advancements in e-commerce, mobile banking, biotechnology, robotics and autonomous vehicles have opened a universe of opportunity that is not confined to the UK, US and other developed markets.

As investors we tend to stick to the familiar. But if we ignore the potential of all global markets, we miss out on opportunities. Here are some reasons to consider including emerging markets as part of your diversified portfolio of investments.

Growing Middle Class Appetite

Both global and local brands are seizing the opportunities presented by the growing middle class in emerging market countries.

BMW now sell more cars in China through their joint venture with Brilliance China than they do in the US or Germany. Nigeria drinks more Guinness than Ireland. These are just two nuggets which illustrate increasing demand among populations whose income is rising. However consumers’ appetite for choice and quality presents opportunities for companies which are often home grown emerging market companies too. This is not just a global brand game. In purely economic terms emerging markets are consuming more, demanding more, and making more than they have in the past.

In addition, emerging market firms are not just supplying their local consumer base, they are extending to other emerging markets and across the developed world – today most people have come across brands such as Samsung, Corona and Tata Motors.

Solid Economic Fundamentals

Good is subjective. Performance is relative. This is why the investment industry loves a benchmark.

Our Journey into Emerging Markets described the FTSE 100 as doing “quite well” over the past three years, producing returns of 24%. By contrast, China's stock market produced a return of 55% over the same period¹.  What is more interesting is that the drivers of these returns are closely rooted in economic fundamentals. Breakthroughs in technology, advancements in e-commerce and huge infrastructural change across mainland China are all contributors to this level of growth, lifting millions of people into the middle class. These fundamentals are crucial for the longer-term outlook.

Short term market wobbles are often instigated by changing sentiment. Sentiment can weigh heavily on markets, with the good often being shaken with the bad. The flavour of the month can change, but companies with strong fundamentals are better equipped to add value for investors over the longer term.

Although China is the oft-cited as the example of the “middle-class boom” these themes are reflected throughout the emerging markets to various extents. Hence the terms “emerging” and “developing” – it’s an ongoing process of change and, ultimately, some of these markets may well end up classified as developed markets.

Nimble Innovators

The impact of new technologies is continuously altering the realm of the possible. Making the most of these advancements requires a level of agility and willingness to change, something the traditional big global brands often struggle to achieve effectively due to their size and scale. However, the advancements in technology have been particularly pronounced in emerging markets. Unhampered by the rigidity of established process or infrastructure, emerging markets are proving to be drivers of change.

This trend in innovation is evident in numerous emerging markets, such as the automotive industry in Indonesia, the uptake of mobile phone apps that are revolutionising the agricultural industry in Turkey, or how outpatient care for diabetes in India is increasingly managed through smart phones. These approaches have allowed companies to effectively address demands that many larger brand competitors failed to recognise, and as such attained first mover advantage into new markets.

Of course, these potentially volatile markets do not necessarily offer a smooth ride but they have the potential to add diversification and growth to your existing investment portfolio.