In the midst of concerns of protectionism following the US election, the emerging markets economies remain alive and well, not only surviving, but thriving, according to Jack Murphy, William Blair’s Chicago-based Portfolio Manager, Emerging and International Strategies.
One of the most important drivers of sustaining the health of these economies over the long-term is the rise of the middle class across the regions.
“With household income distribution shifting and tens of millions of consumers transitioning into the middle class, emerging market companies that offer an evolving mix of innovative consumer-driven products and services across a range of industries targeting the middle class are ideally placed for future growth and positive returns,” Mr Murphy says.
As household income shifts, supported by favourable demographics and urbanisation, emerging markets are forecast to account for about 60% of growth in urban consumption from 2015 to 2030, delivering strong growth potential for discretionary products and services moving forward. Mr Murphy says this means there are valuable investment opportunities to be found across companies that cater to the rising middle class.
“In emerging markets, there are attractive investment opportunities in companies that are adapting to this shift in the middle class and the evolving emerging consumer,” he says. “We take a holistic approach when looking at the consumer opportunity to consider all industries that directly serve the emerging consumer, expanding beyond the consumer discretionary and consumer staples.”
While the consumer discretionary and staples sector comprises just about 20% of the MSCI Emerging Markets IMI, when viewed holistically consumer-driven industries comprise about 40%, effectively doubling the opportunity set.
This holistic approach to investing in the consumer includes such areas as consumer finance, healthcare, airlines/airport services, communication equipment, internet software and services, home entertainment software, REITs (hotel, residential, retail) and telecommunications services.
“Particular sectors that are ideally placed for future growth and potential investment opportunities include the Beauty and Personal Care sector which is experiencing growth rates of 12% and 14% across India and Indonesia respectively, versus a 2% growth rate in the USA, the education sector in which spending has outpaced that of developed nations, the Tourism sector which provides investment opportunities throughout Asia as it penetrates the middle class market and last but not least, the online sector.”
With regards to the online sector, in China alone, Internet revenue is expected to increase by 140% from 2014 to the end of 2017. China is also the largest online gaming market worldwide, with about one-quarter of the world market in 2015 and growing at an annual rate of 23% since 2015.
“While protectionism is a risk to EM, the case for strong long-term consumption growth in emerging markets remains compelling,” Mr Murphy says. “That is why William Blair believes that there are ample investment opportunities to be found across these consumer-driven industries as they provide higher growth and returns in emerging markets.”
