The emerging market strategist is focussing on companies in the developing economies that serve growing domestic demand in light of the slowdown in developed economies.
He says that owning businesses which are removed from the stagnation in debt-addled nations in Europe and North America is the best way for unit-owners to see a sizeable return on their investments.
“The way to think about growth in emerging markets is to characterize it as having two components: correlated growth, which is driven by links with the developed world, and uncorrelated growth, which depends more on the internal dynamics and demographics of the emerging markets themselves,” he explains.
He adds: “From this viewpoint, exporters and global commodity producers largely represent correlated growth, while domestic demand mostly represents uncorrelated growth. In light of an economic environment in the developed world that seems increasingly vulnerable to a ‘seven lean years’ scenario, we think the case for investing in domestic demand is particularly strong relative to other segments within emerging markets because domestic demand represents a pure play on the economic growth of these countries.”
The comments come in light of a report from The Organisation for Economic Co-operation and Development (OECD) published today which predicted a significant slowdown in growth in the developed world.
“It is hard to see how companies that export primarily to the developed world can do well unless economic growth in the developed world picks up,” continues Divecha.
“Given the large debt burdens prevalent in most major developed economies, it seems increasingly unlikely that the U.S., Europe, or Japan will experience high economic growth rates over the next few years. Thus, for exporters to do well, they would have to take market share from both developed and emerging competitors.”
Data from FE Analytics shows that the MSCI EM (Emerging Markets) index has grown 72 per cent in the last five years. By comparison, the FTSE – and other developed market economies – have remained relatively flat.
Performance of emerging market index vs FTSE
Source: FE Analytics
According to Divecha, one of the most compelling reasons to invest in emerging market economies is the demographic shift that is set to swing in favour of domestically focussed companies over the next few years.
“What makes an already good story potentially explosive is the fact that demographics are not static and indicate that the number of people in their prime working and consuming years will also rise dramatically in the next few years - both in absolute terms and relative to the developed markets,” he explains.