EM growth should, on average, outpace developed market growth. However, to be successful in EM investing, one must look beyond China. EM economies are diverse, and this offers several opportunities for investors looking to diversify.
Any decision to allocate to emerging market (EM) equities is typically predicated on growth. The size of China’s economy and its rate of growth, which have a significant impact on EM returns, also weigh on such decisions. Figure 1 illustrates the equity market correlation of various EM economies to China against those economies’ export exposure to China. In general, this means, the more export exposure an EM economy has to China, the more correlated is its equity market to the country. For instance, countries such as Taiwan, Korea, Thailand, South Africa, Chile and Peru, which have higher export exposures to China, have higher sensitivity to movements in China’s equity market. However, this also means that India, Indonesia, Russia, Poland, Brazil and Mexico, which have relatively lower export exposures to China, have lower sensitivity to China’s equity market. In other words, this correlation perspective demonstrates that EM economies are not all the same and significant opportunities exist beyond China’s orbit.
We expect EM growth to, on average, outpace developed market growth. However, at the country level, growth is bound to be mixed. There are many EM countries that are falling below their growth potential. To that extent, if the prospects of these countries were to improve, the growth profile of the EM benchmark should broaden. Although, based on political cycles, there are ebbs and flows in the momentum of structural reforms in EM, in many instances, as in the case of Brazil, the direction of such reforms tends to remain positive. Credit metrics of many EM countries have improved along with an improvement in policy transparency and credibility. Such fundamental improvements, in combination with positive demographic trends, such as a rising middle class and higher potential growth, should result in increased investment opportunities in EM economies.
Homi Kharas of the Brookings Institution, in a paper titled “The Unprecedented Expansion of the Global Middle Class”, estimates middle-class growth in emerging economies to be at 6% or more per year, compared with just 0.5%-1.0% for advanced economies. Figure 2, adapted from the paper, shows middle-class consumption in the top-10 countries for 2015 along with consumption estimates for 2020 and 2030 based on purchasing power parity (PPP). In 2015, just four EM countries made the list – China, India, Russia and Brazil. By 2030, as per the estimate, Indonesia and Mexico should make the list, displacing France and Italy, bringing the total number of EM economies in the top-10 list to six. The paper also projects that by 2030, each of Pakistan, Turkey and Egypt would have middle-class markets larger than US$1 trillion in size and that the Philippines’ middle class would spend more than that of Italy’s.
As the EM middle class continues to grow further, the consumption mix will not only change but also expand beyond just spending on staples. Consumer demand should increase for housing, healthcare, financial and insurance products, smartphones, luxury items as well as for services such as e-commerce, food delivery and taxi.
In India, for instance, middle-class consumption is expected to more than double between 2020 and 2030. Figure 3 illustrates the percentage distribution of India’s households by their income profile. By 2030, the country is expected to add about 140 million middle-income and 21 million high-income households. According to a World Economic Forum paper titled “Future of Consumption in Fast-Growth Consumer Markets – India,” upper-middle-income households in India are expected to drive about 47% (valued at US$2.8 trillion) of total consumption by 2030, compared with 30% now. High-income households will only add 14%, or US$0.8 trillion, compared with 7% currently.
In searching for opportunities in EM economies beyond China, one important trend to focus on is the rising size of the middle class and the impact that trend may have on individual and household consumption. Given their large populations, increasing consumption stands out in countries such as India and Indonesia, but other EM countries such as Russia, Brazil and Mexico should also benefit from the rising income trends in their respective economies.
In this context, it is worth mentioning that structural reforms in India, Indonesia, Russia and Brazil are continuing to progress following key elections in those countries over the past couple of years. In Brazil, social security reforms are progressing, with its Senate approving an overhaul of the country’s pension system on 22 October. Social security and tax reforms along with planned privatizations should improve Brazil’s credit profile and enhance efficiencies in both its public and private sectors. Similarly, lower sanctions risk in Russia, combined with the country’s credible macro policy, continued reforms and economic recovery, should pave way for increased exposure to a market that has quality companies with attractive valuations. This exposure offers additional diversification relative to other EM economies and China.
EM economies are facing various near-term challenges including US-China trade tensions and a strong US dollar. However, the long-term growth case for EM remains intact. At a stock-specific level, opportunities will continue to present themselves across the entire EM spectrum. Good stock selection could uncover these opportunities and broaden the sources of robust returns.
The views expressed in this material are the views of George Bicher and Laura Ostrander through the period ended 10/24/2019 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
The targets and estimates are based on certain assumptions and there is no guarantee that the estimates will be achieved. Investing involves risk including the risk of loss of principal.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed.
There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA's express written consent.
The information provided does not constitute investment advice and it should not be relied on as such. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor.
The trademarks and service marks referenced herein are the property of their respective owners. Third party data providers make no warranties or representations of any kind relating to the accuracy, completeness or timeliness of the data and have no liability for damages of any kind relating to the use of such data.
SPDR ETF is the exchange traded funds ("ETF") platform of State Street Global Advisors and is comprised of funds that have been authorised by European regulatory authorities as open-ended UCITS investment companies.
SSGA SPDR ETFs Europe I and II plc issue SPDR ETFs, and is an open-ended investment company. The Company is organised as an Undertaking for Collective Investments in Transferable Securities (UCITS) under the laws of Ireland and authorised as a UCITS by the Central Bank of Ireland.
ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETFs net asset value. Brokerage commissions and ETF expenses will reduce returns.
SSGA SPDR ETFS MAY NOT BE AVAILABLE OR SUITABLE FOR YOU. THE VIEWS EXPRESSED/INFORMATION IN THIS SITE DOES NOT CONSTITUTE INVESTMENT ADVICE, FINANCIAL, LEGAL, REGULATORY, ACCOUNTING OR TAX ADVICE. INDEPENDENT ADVICE SHOULD BE SOUGHT IN CASES OF DOUBT. NEITHER THE INFORMATION NOR ANY OPINION CONTAINED ON THIS SITE CONSTITUTES A SOLICITATION OR OFFER TO BUY OR SELL SHARES OF THE FUNDS OR ANY OTHER FINANCIAL INSTRUMENT.
Standard & Poor's®, S&P® and SPDR® are registered trademarks of Standard & Poor's Financial Services LLC (S&P); Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (Dow Jones); and these trademarks have been licensed for use by S&P Dow Jones Indices LLC (SPDJI) and sublicensed for certain purposes by State Street Corporation. State Street Corporation's financial products are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates and third party licensors and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability in relation thereto, including for any errors, omissions, or interruptions of any index.
SPDR ETFs may be offered and sold only in those jurisdictions where authorised, in compliance with applicable regulations.
Information related to Mexico
This information does not constitute and is not intended to constitute marketing or an offer of securities and accordingly should not be construed as such. The Funds referenced herein have not been, and will not be, registered under the Mexican Securities Market Law (Ley del Mercado de Valores) and may not be publicly offered or sold in the United Mexican States. Disclosure documentation related to any of the aforementioned Funds may not be distributed publicly in Mexico and shares of the Funds may not be traded in Mexico.
You should obtain and read a prospectus and KIID relating to the SPDR ETFs prior to investing. The prospectus/KIID describing the characteristics, costs, risks and other relevant information of SPDR ETFs are available for residents of countries where SPDR ETFs are authorised for sale on the SPDRs website or from Cecabank, S.A. Alcalá 27, 28014 Madrid (Spain) who is the Spanish Representative, Paying Agent and distributor in Spain.