by Daisy Mbiuki - June, 2021
Income Emerging markets are fast-growing economies with lower per capita compared to developed economies. Although these countries have some characteristics of developed markets, they still do not meet the criteria to be classified as developed markets and are therefore transitioning from the developing phase to the developed phase.
While classified as emerging, companies in these countries are increasingly becoming common household names: Samsung, Hyundai Motor and Tata. Investing in emerging markets can be a great way to augment your portfolio and tap into countries and segments that are experiencing immense growth. That said, any investor knows that with greater returns comes a higher level of risk and that holds true especially for emerging markets. Although emerging markets offer the potential for competitive returns over the long term across a variety of countries and industries, this growth comes with some level of volatility and vulnerability. Unlike advanced economies, these developing economies are likely to start pedalling backwards due to political and economic uncertainty among other factors. All in all, they offer an important diversifier for investors’ portfolios and any investor willing to take the risk stands a chance to realize great returns in a growing market that has not been saturated.
So, which are these emerging markets?
From this list, we take a closer look at two of the largest emerging markets in the world.
China
It has become impossible to ignore China and the cost of choosing to might be too high in the long run. China has emerged as a global economic superpower in recent decades and the Chinese consumer opportunity is one of the most attractive and exciting opportunities for investors. With one-fifth of the world’s population living within the country’s borders today, China is by far the largest emerging market not just by population but also by GDP and stock market capitalisation. It is also the 2nd largest economy in the world and expected to overtake the US in the coming decades.
The rising affluence and greater sophistication among Chinese consumers has brought new trends and opportunities to the market, becoming a powerful driver for growth in consumer businesses. Having emerged from the pandemic to a large extent, the Chinese middle class are already looking to spend their money on higher-end products and services. This presents an enormous opportunity from both a consumer penetration and premiumization perspective.
Over the last few decades, China has seen a lot of advancements in their industries in areas like precision manufacturing, advanced materials and chemicals, semiconductors and technology, pharmaceuticals and renewable energy. The “Made in China 2025” plan is aimed at rapidly expanding high-tech sectors and developing the country’s advanced manufacturing base. The Industrial policy seeks to make China dominant in global high-tech manufacturing by the use of government subsidies, mobilizing state-owned enterprises, and through the pursuit of intellectual property acquisition to catch up with— and then surpass —Western technological prowess in advanced industries. They are also investing at an unprecedented scale in other parts of Asia and other emerging markets.
How to Invest in China
China has the 2nd largest equity and bonds market in the world. The Chinese stock market is quite a peculiar one. China stocks are listed in different exchanges all around the world and are divided into three main categories: the A Shares, the H-Shares and the N-Shares. The A-shares are those listed on the mainland stock exchanges that is the Shanghai and Shenzhen Stock Exchanges. Most of the companies listed here are large, state-owned companies. The H-Shares are those listed on the Hong Kong Stock Exchange while the N-Shares are those listed on the New York Stock Exchange or the Nasdaq.Aside from buying mainland stocks, investors can participate in China through mutual funds, Exchange Traded Funds(ETFs), and Chinese companies with listings on Nasdaq and the New York Stock Exchange. An example of China ETF is the iShares MSCI China ETF.
ETFs have become a cheap and easy way to invest in the markets and they allow investors to bet on a general trend rather than having to spend effort and time to get the stock picks right. Investors can choose emerging market ETFs that provides them with a broad exposure or choose to go with the more country-specific or sector-specific (thematic) ETFs that reduce reliance on one country.
Investing in India
In Asia, India presents the biggest opportunity outside of China. Despite the COVID-19 pandemic taking a huge toll on India with the country undergoing a severe lockdown and a devastating new variant, the long-term opportunities remain intact. India has a population of 1.38 billion people (2020) and UN report projects India will surpass China to become the world’s most populous country by 2027. Just as in the case of China, a massive shift towards a middle-class society is already happening in India. A report by Financial Express suggests that nearly 55% of the Indian population is expected to join the ranks of the middle class. Since India’s demographics are much younger compared to China and the US, India’s middle class could be the largest in the world (in terms of population) by 2025.
Although the Government of India has done a lot of work to simplify the investment route to India, foreign investors’ participation is still very low in the country. So going where few people have gone/are going right now will provide an opportunity to catch that big wave when they do start coming. We see growth in India coming from the three major trends- that is, the emerging market consumer, the computer (use of smartphones), and the internet. Other industries such as real estate, manufacturing and infrastructure will also see immense growth in the coming decades as India continues to develop. To tap into the growth in India, investors can invest in stocks or in ETFs. An Example of India ETF is the MSCI India Index (INDA) that tracks the leading Indian stocks.
Important Considerations
Do your Research: Investors need to invest in understanding the individual national markets and specific companies within them. Having boots on the ground in these countries might be expensive but will help the investor take advantage of the insights they gather by using them to realize higher returns.
Select the best ETF for you: When it comes to ETFs, selecting the index to invest in plays a major role in your returns. Some of the emerging segments and trends that we see in these countries like the rising consumer class, urbanization and digitization are not well captured in the traditional indexes which are mainly dominated by the legacy companies such as banks and state-owned enterprises. Some of the broader indexes also tend to favour one particular nation in their weightings, in this case, China due to its dominance. For example, China has a weighting of around 37% in the MSCI emerging market index.
As earlier noted, with higher returns, comes greater risk. However, the risks of investing in emerging markets vary from country to country. Therefore, investors should factor in some of the risks that are associated with these emerging markets such as political risk and currency fluctuations. The trade wars between the US and China also remain a headline risk for investors looking into China.
Disclaimer: The author has no position in any stocks mentioned. Investors should consider the above information not as a de facto recommendation, but as an idea for further consideration. The report has been carefully prepared, and any exclusions or errors in it are totally unintentional.