What is the economic development opportunity?
Identifying structural shifts relies upon our ability to establish the long-term direction of change. We believe that policy focus is increasingly shifting towards a more inclusive, innovative and sustainable economic model and that “next generation” economic development looks quite different from traditional ideas of growth. In our view, growth 1.0 had three key hallmarks. It was characterised by concentrated growth — few but large winners. Environmental neglect was an unfortunate and uncosted byproduct. And globalisation drove down costs, leading to larger supply chains and cheaper labour and capital. In contrast, we think next-generation economic growth/development is more inclusive, as the base of beneficiaries of economic progress broadens. The emergence of ESG and the impacts of climate change will see a new emphasis on sustainable growth. Finally, as globalisation unwinds, pressure to increase efficiency in manufacturing and service sectors will reward innovative solutions to problems.
This vision of a more inclusive, sustainable and innovative future helps shape a road map for investors and, in our view, is particularly relevant within EMs. We expect a certain degree of complexity to persist within EM investing, but the use of this structural lens helps us see clarity in a number of stories. What’s more, the EM context itself may serve as a driver, for several key reasons:
A big focus of the next decade will be on green technology and science-based industries such as high-end manufacturing. EM is a diverse asset class, and despite the slowdown in China, many other EM countries could see growth accelerate, which will drive relative earnings and market share.
Another driver is demographic change. Emerging markets account for 82% of the world’s population but currently only 26% of global market cap1. A younger demographic and an expanding middle class could drive increased revenue for companies through premiumisation and the increasing adoption of progressive technology.
Deglobalisation has meant that supply chains are diversifying fast as they look to become more self-reliant and less dependent on China. Countries with relatively low wages but skilled workers or access to advanced technology — such as India, Indonesia, Thailand, Vietnam and Mexico — are benefiting from this supply chain diversification.
Digitisation and infrastructure development may have an advantage in EM. Emerging markets have fewer legacy issues than DMs when building new infrastructure. This confers an advantage when building smart cities, 5G networks and transport networks. The same goes for EV development and future consumption.