Many consumers probably don’t realise the importance emerging markets play in their everyday lives. Not only as providers of the raw materials powering their favourite high-tech devices, but also as drivers of innovation in areas such as electric vehicles, green energy and as providers of information technology (IT) services.
A significant part of the next billion of middle class consumers will come from emerging markets, which we believe will continue to drive both consumption growth and ‘premiumisation’ (the emphasis on producing premium, higher-quality products with pricing power over cheaper, often inferior goods). Rapid technological changes have also opened up a diverse set of opportunities in emerging markets for investors.
Consumer penetration and premiumization
The emergence of online platforms and the supporting infrastructure of logistics and payments have augmented the growth in middle class consumers to drive the penetration and premiumization of both goods and services in many emerging markets. This has created growing opportunities across e-commerce, logistics, food, mobility and financial services.
For example, India now boasts a unique digital payment system, Unified Payments Interface (UPI), which has accelerated growth in mobile app-based payments – total UPI-based transactions rose to $84bn in fiscal year 2023, with transaction value up 65% year-on-year. Many of the key financial services of lending and insurance are also provided online, which has enhanced reach and speed of delivery.
High tech and renewable energy
Emerging markets dominate segments of the technology and renewable energy industries, which include semiconductors and solar panels as well as information IT services.
Demand for semiconductors is forecast to grow in the coming years, with demand for increased processing power to drive artificial intelligence applications and the internet of things. Taiwan currently produces more than 60% of the world’s semiconductors and more than 90% of the most advanced ones.
While developed markets including the United States are striving to reduce their reliance on markets overseas for these vital components by building manufacturing plants at home, emerging markets are participating in that asset creation process even though it might be a costly and lengthy process.
National commitments to reduce carbon emissions are also driving renewable energy demand, and emerging markets have a vital role to play. Technology advancements in renewable energy will enable a lower cost of generating electricity for many of the thermal energy-dependent emerging market economies, which should further support their growth.
The theme of this year’s World Economic Forum (WEF) was ‘Unlocking the renewable energy future in emerging markets,’ recognizing the vital importance of renewable energy for these markets. The WEF stated that accelerating the deployment of renewable energy can be a significant opportunity for individual countries to bolster their energy security, reduce reliance on fossil fuel, and meet their net-zero targets.
The definition of growth stocks is changing
New industry groups are emerging, including electric vehicles, batteries and renewable energy, which are growing rapidly, but are coming from a low base. The definition of what constitutes growth in the market keeps changing and investors must keep this in mind. Many sectors in emerging markets which were once considered growth are no longer growing as fast. We think it’s important for investors to be selective – we look at the prospects of individual companies, rather than make distinctions between growth and value. Geopolitical risks are always a consideration within emerging markets, as policy can quickly change course.
What are the risks?
All investments involve risks, which for international equities include currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.
The government’s participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries.
There are special risks associated with investments in Greater China, including less liquidity, expropriation, confiscatory taxation, international trade tensions, nationalisation, and exchange control regulations and rapid inflation, all of which can have a negative impact. Investments in Taiwan could be adversely affected by its political and economic relationship with China.
Chetan Sehgal is lead portfolio manager of Templeton Emerging Markets Investment Trust. The views expressed above should not be taken as investment advice.