Opportunities and risks in the emerging equity markets
It is predicted that by 2020 the emerging market economies will have overtaken the developed countries in combined size.
Replace debts, ageing populations and crisis in the Western countries with youth, rising middle classes and very low debt levels. That is, broadly speaking, the difference between the established Western economies and the “emerging markets”.
Aberdeen Asset Management manage several of Danske Invest’s equity funds focusing on emerging markets, including Danske Invest Latin America, Danske Invest Far East and Danske Invest Emerging Markets. These funds all hold five stars in the Morningstar ratings, which means that they have performed very well compared with other investment funds with the same focus. We asked portfolio manager Nick Robinson from Aberdeen’s São Paolo office what makes the emerging markets so special.
A growing middle class
Nick Robinson explains that several strong long-term factors will drive growth in the emerging markets. Demographics, for example.
“More people are entering the middle class and hence becoming wealthier. This helps to fuel domestic consumption. People get permanent jobs and can open bank accounts, which allows them to raise loans to increase their consumption. This is an advantage to many sectors that are dependent on domestic consumption, such as the financial sector and the consumer sector. And since consumer borrowing is still relatively low in the emerging markets, this trend may continue for many years,” Nick Robinson adds.
Focus on consumer durables
Domestic consumption is something that Nick Robinson and his colleagues at Aberdeen Asset Management attach great importance to in their management of Danske Invest’s funds. Rising middle classes and prospects of positive growth in the future make investments in companies selling consumer durables to the home market interesting.
In Nick Robinson’s assessment, growth in the emerging markets will continue, even though there is a crisis in the West. In fact, Aberdeen believe that the emerging markets’ share of global GDP will exceed that of the developed countries by 2020.
Economies in better shape
“Several of the economies in the emerging markets, such as Latin America, are in better shape than most developed economies. So these countries have plenty of fiscal and monetary-policy ammunition which can be used to stimulate their economies if the global economic climate deteriorates,” Nick Robinson explains.
Nevertheless, the road may be bumpy for the next year, and the current EU debt crisis will lead to low growth in the developed countries. This may have a knock-on effect on the emerging markets, including Latin America. So Nick Robinson predicts that we may see a couple of quarters with low growth this year. But he emphasises that the engine driving long-term economic growth in the emerging markets remains intact.
