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Emerging markets special report

Developing economies are the engines of global growth

Important - Please remember the value of investments can fall as well as rise, so you could get back less than you invest, especially over the short term. The information shown is not personal advice, if you are unsure of the suitability of an investment for your circumstances please contact us for personal advice.

Nadeem Umar
Research Editor

Emerging markets is quite a loosely defined term. Countries lumped into this category tend to be growing quickly, or going through some sort of reform. While China’s widely recognised as an economic superpower, it shares a collective definition with Peru because it’s still going through change.

Here in the UK our population is fairly steady, and our growth slow. We’re still making progress, but we’re much closer to economic stasis than our emerging market peers – not much is changing. In contrast, almost half of India’s population is under 25.

Driving global growth

Emerging markets are home to most of the world’s population. They’re generally full of youthful, aspirational workforces. And their wages are predicted to grow much quicker than in the developed world.

The story, and investment case, behind emerging markets isn’t just about how much they can manufacture anymore. Emerging market economies are shifting from export led to consumer driven – they want to spend.

But how does this translate to global growth?

The fastest-growing luxury consumer market, China, continues to be supported by a growing middle class, with latest indication of consumer confidence remaining positive.

Burberry annual report, 2019

Take British luxury brand Burberry as an example. It now makes 41% of its sales in the Asia Pacific region. This doesn’t include emerging market tourists buying the brand in London, either. That might sound negligible, but UK sales rose close to 40% at the end of 2016 thanks to sterling’s fall after the referendum – people flew out and shopped.

A step back from luxury, think about the basics. Since 1990 extreme poverty around the world has more than halved.

In India alone, it’s falling by 44 people every minute. More and more people can afford what we might consider the basics, from toothpaste to cleaning products.

Every day a third of the world uses a Unilever product. The group makes and sells household items like Dove, Magnum and Persil. That means this UK listed business is well placed to capture increased spending in developing countries.

The technology multiplier

Gross domestic product, GDP, is the most common figure used to measure a country’s economic growth. It’s the total value of all goods and services produced by a country. But it doesn’t capture everything.

This morning I ordered a coffee using click and collect on an app. The £2.50 I paid will be included in GDP figures, but the fact I saved 5 minutes of my time avoiding a queue won’t. If I do this each working morning I’m saving more than 21 hours a year. It doesn’t matter if I use that time to relax or work – I’m still better off.

Scale that up a bit. What if I could hail a taxi, pay friends, and do my shopping, all from an app. I can, but so can most of the emerging world. China’s WeChat lets me do it all from a single app. It even has a function to file for a divorce.

India (which is the number one country in the world for mobile data usage) now has biometric ID data on almost 1.2bn of its population –10 fingerprints and 2 iris scans. Thanks to that technology, most Indians can open a bank account in 10 minutes, resulting in 99.9% of households now having access.

We might have beaten them to biometric chips in passports, but developing economies are using technology as an economic springboard.

Investing in emerging markets

While there’s lots of growth potential on offer in emerging markets, it doesn’t come without risk. These economies are still developing and some are going through major changes. Venezuela, for example, has suffered a myriad of issues recently.

Emerging markets as an investment sector covers a very broad area though, which can act as some natural diversification, spreading money over a few higher-risk areas. From Brazil to Bangladesh, you can avoid being fully exposed to the risks of a single country.

There are a lot of elections in emerging markets to come this year, which could spark some periods where share prices move sharply. We don’t think this is a reason to avoid emerging markets, it comes with investing across so many countries, but it’s worth keeping in mind.

There was recently a general election in India, but events to come are in South America and emerging Europe.

Event Date (2019)
Argentina’s general election 27 October
Ukraine parliamentary elections 27 October
Bolivia’s general election October
Uruguay’s presidential congressional elections October
Poland general elections October/November
Romania presidential elections November/December

When taken as a whole, and when investing over very long time-frames, emerging markets actually have a better risk-to-reward ratio than other markets. This isn’t the case for shorter time frames though, so it’s even more important to have a long-term view.

Our preferred way to invest broadly across emerging markets is the iShares Emerging Markets Equity Index Fund. It aims to track the FTSE Emerging index and invests in more than 1,000 companies across global emerging markets with a net-ongoing fund charge of just 0.24%. Our annual platform fee of up to 0.45% also applies.

Annual percentage growth
June 13 -
June 14
June 14 -
June 15
June 15 -
June 16
June 16 -
June 17
June 17 -
June 18
iShares Emerging Markets Equity Index Fund 4.8% 1.8% 25.5% 5.6% 8.0%

Past performance is not a guide to the future. Source: Lipper IM to 30/06/19.

iShares Emerging Markets Equity Index Key Investor Information

More about this fund, including charges

Next – China

Kate Marshall
Senior Investment Analyst

Rise of the consumer

Are you worried about the US-China trade war?

Well, you shouldn’t be – at least not according to those on the ground in Asia. While here in the West the trade war dominates headlines, not least because of US President Donald Trump’s unorthodox Twitter activity, in the Far East they are far more sanguine.

It's true the headline figures for the trade tariffs sound scary. Last year, the US imposed three rounds of tariffs of up to 25% on more than $250bn worth of Chinese goods. China retaliated by imposing tariffs, also up to 25%, on $110bn of US products.

More recently, Trump threatened to impose new tariffs of 10% on $300bn of Chinese goods. This unsettled markets, but China has more levers to pull to help soften the worst effects of a trade war. Following Trump’s words of caution, China’s central bank allowed the country’s currency to weaken. This makes its goods cheaper for overseas buyers, which could keep demand buoyant.

The story in the east

There's no doubt the trade dispute's had some impact on China, in terms of both confidence and foreign investment. It's encouraged some companies to relocate their manufacturing facilities to neighbouring Asian countries, taking business away from China.

Economic growth is also slowing, though that's been widely anticipated despite the trade war because of the amount of change taking place. China's transitioning from being reliant on exports and manufacturing growth, to more on consumption, innovation and technology. This could lead to a natural slowdown in the economy, which should gradually level out to a more stable rate.

The feeling on the ground is much more buoyant, especially in terms of things like retail and consumption. Historically, less than half of Chinese growth has been driven by consumption, compared with 70% in the US. Now the home of a 1.3bn population, the potential for consumption growth is huge. The population is getting richer and income per person has been growing rapidly, at around 7-8%. Domestically, at least, there's still lots to be positive about.

Technology is creating huge opportunities too. E-commerce is increasingly playing a role here and provides a platform for businesses to advertise, expand brand awareness and sell products, and for consumers to buy them at the click of a button.

China's young population could help drive this trend. It has 415m millennials, more than the entire working population of the US and Western Europe combined. This group of people tend to be technology savvy, confident and willing to spend more online. It's a potent combination that lots of businesses aim to take advantage of.

How to invest – Aberdeen Asia Pacific Equity

shopping district in China

We think most long-term portfolios, which can accept the extra risks, should consider having some exposure to China. Lots of companies based there have ambitious plans for the future. They're ready to take on Western companies and leave behind the focus on low-cost manufacturing that has fuelled growth in the past.

China's development could have a far-reaching impact on the global economy, particularly on its emerging market neighbours that share close trade links. So for most investors, broader exposure to the developing world is a good initial approach. Funds that offer exposure to a specific country could then be added to a more-diversified portfolio. Compared to developed markets, emerging markets are higher-risk.

We like the Aberdeen Asia Pacific Equity Fund as a way to invest across the region. We think experience counts for a lot when it comes to investing, and the team behind the fund have it in spades. They've shown an ability to pick some of the best-performing Asian companies in the past and we think the fund has the potential to do well in future.

Aberdeen Asia Pacific Equity - 20 year performance

Scroll across to see the full chart.

Past performance is not a guide to the future. Source: Lipper IM to 30/06/19

Around one quarter of the fund is currently invested in China. The team has added to investments there over the past year, particularly in China A-shares (the shares of mainland China-based companies). They're now easier for foreign investors to buy and sell than they've been in the past. And they tend to be domestically focused, so the managers think they're a great way to take advantage of growing consumption.

China is undergoing a dramatic and ambitious transformation, but challenges on the road to reform are to be expected. While the slowing of Chinese economic growth to a more sustainable pace could be a positive, it should be remembered this is a multi-year, perhaps even a multi-decade, story. So a long-term outlook is essential.

Annual percentage growth
June 2014 -
June 2015
June 2015 -
June 2016
June 2016 -
June 2017
June 2017 -
June 2018
June 2018 -
June 2019
Aberdeen Asia Pacific Equity 4.7% 2.9% 27.7% 4.2% 9.9%
FTSE Asia Pacific ex Japan 8.6% 6.8% 27.7% 7.0% 5.1%

Past performance is not a guide to the future. Source: Source: Lipper IM to 30/06/19

More about this fund including charges

Aberdeen Asia Pacific Equity Key Investor Information

Next – India

Kate Marshall
Senior Investment Analyst

China is the epicentre of the emerging world. It's no surprise. Rapid urbanisation, a vast population, and the creation of some of the world's largest tech firms has seen the country transform like no other.

We think it still has room to grow. But it's no longer the only player in town. India is now snapping at China's heels as it vies for a place as an economic powerhouse.

India's secret weapon

Image of young indian workers in an office

India's vast and young population could be its secret weapon. Almost half the country is under the age of 25, and two-thirds are below 35.

This young cohort of people could help India take the next step on the economic roadmap. Much of India's youth still lives in less developed parts of the country. But more of them are moving to urban areas to look for education, work, and the opportunity to succeed.

Any real change won't happen overnight though. There's plenty of work to be done – India is still in desperate need of better infrastructure, more jobs, and other economic reform.

But Narendra Modi could be the one to enact this change.

Modi was recently voted India's prime minister for the second time running. It was a landslide victory and its significance shouldn't be underestimated, as it ensures continuity in governance and further economic reform.

Modi aims to turn India into a global leader and lay the foundations for stronger growth. And he's already implemented some key pieces of reform.

For example, 'India Stack' has been set up as a way to modernise India. It’s a huge software platform that could bring India's population into the digital age. It offers people a more effective way of accessing basic education, health, food services, and other benefits. It also allows more people to open a bank account and make them part of the formal economy.

It helps that technology is increasingly affordable across India. It's now the number one country in the world for mobile data consumption. The number of active smartphone users has gone up dramatically in recent years, boosted by the falling cost of data.

So not only does India now have a more efficient way of paying people benefits and wages, they also have the platform to spend. Consumer spending could rise exponentially over the years, and ultimately benefit the businesses that sell their goods and services to consumers.

India's path to economic success won't always be a smooth one, and sometimes reform will bring disruption with it. But the longer-term impact on the economy and businesses could be huge. For those that are able to accept the ups and downs, we think investing in India offers the opportunity for significant growth, though this will be over many years rather than months.

Remember investments can fall as well as rise in value and you may not get back what you invest.

How to invest – Jupiter India

jupiter india image - Mumbai city landscape at sunset

Jupiter India is one of our favourite funds for investing in India. It's run by Avinash Vazirani, who has more than two decades of experience investing in these markets.

He focuses on the areas that could benefit from broader trends in India, such as rising wealth and domestic consumption. This includes financial, consumer goods, and healthcare companies.

Companies such as the State Bank of India and ICICI Bank could benefit from the anticipated rise of India's finance industry, for example. And to try to take advantage of rising consumption, Vazirani's invested in companies like Gillette India, the seller of razors and other personal care products, and Interglobe Aviation. It’s India's biggest airline and could benefit if the growing middle class increases the popularity of domestic air travel.

Vazirani takes a flexible approach and invests in companies of all sizes. A focus on small and medium-sized companies differentiates the fund from others investing in India. Our analysis shows it's boosted performance over the long run. But smaller companies are higher risk and volatile at times. We've seen this over the past year as they haven't performed as well as larger companies.

Avinash Vazirani career track record

Scroll across to see the full chart.

Past performance is not a guide to the future. Source: Lipper IM to 30/06/19

Annual percentage growth
June 2014 -
June 2015
June 2015 -
June 2016
June 2016 -
June 2017
June 2017 -
June 2018
June 2018 -
June 2019
Jupiter India 23.2% 18.5% 31.6% -12.8% -4.5%
FTSE India 15.1% 11.6% 24.8% 4.8% 9.8%

Past performance is not a guide to the future. Source: Source: Lipper IM to 30/06/19

India has the potential to become the world’s next economic marvel. With a talented fund manager at the helm, we think Jupiter India is well-positioned to take advantage of the opportunity.

Investing in a single country, especially an emerging market like India, is a high-risk way to invest. So it’s important to take a long-term view, and be prepared to ride out the inevitable ups and downs. We suggest a fund like this makes up a small portion of a portfolio that's able to take on a little more risk in search of long-term growth.

More about this fund including charges

Jupiter India Key Investor Information

Next – Share ideas

George Salmon
Equity Analyst

Nicholas Hyett
Equity Analyst

Emerging markets often get lumped together, but the similarities between economies as diverse as China and Kuwait are few and far between. The range of growth rates says it all. According to the IMF, Venezuela’s GDP is contracting at a rate of 25% a year, while Ghana’s growing at 8.8%.

You don’t have to have access to every stock market in the world to invest in these trends though.

We look at three UK companies which have made money in higher-risk emerging markets. Remember all investments can fall as well as rise.

NMC – Middle Eastern promise

Dubai city landscape

NMC was founded in 1974, when an Indian doctor went to set up shop in the UAE. His operations soon grew into running hospitals, and today the group employs over 2,000 doctors and treats 8.5m patients a year.

The majority of those are in the UAE, which accounts for 88% of revenue. It may be packed full of wealthy expats, but health infrastructure still lags behind Western economies. An ageing population means the state has launched a major drive in public care, but private providers should feel the benefit too.

NMC revenue by Geography

Scroll across to see the full chart.

Source: Thomson Reuters Eikon, to 25/06/2019.

Even so, growth rates in the Emirates are unlikely to match the meteoric rates seen in recent years. The benefit of healthcare reforms has already worked through, and the group’s already among the market leaders. Instead, NMC’s turned its focus to Saudi Arabia.

A joint venture with a major Saudi Arabian pension fund should see the partnership become one of the biggest players in that market. The attractions are clear. The percentage of over 65s is expected to triple in the next decade, while Saudi Arabia has some of the highest instances of diabetes in the world.

NMC has developed excellent business relations over its 45 year history, and has adapted well to the Emirati culture. However, the expansion into Saudi Arabia not only brings operational risk, the heightened tensions around the Gulf bring geopolitical risk too.

The prospective yield is a relatively trim 1.2% in 2020, but hopes are high that profit will rise and those increases translate to a rising payout in the years ahead, although there are no guarantees.

Find out more about NMC

Wizz – come fly with CEE

Passengers seated on a plane

You might think of emerging markets as far flung, exotic locations. But many are actually close to home.

Central and Eastern European (CEE) economies like those in Poland, Hungary and Romania are growing fast. We’d expect demand for air travel to rise with disposable income, and budget airline Wizz is plugged in to their development.

And it’s not just a case of having a favourable tailwind either. Wizz has impressed us operationally too, holding non-fuel operating costs per seat stubbornly flat. Passenger numbers are 16.7% ahead of last year, and while that’s boosted by the addition of new routes, load factor – a measure of how full the planes are – has risen to 92.8%.

Wizz Air Passengers carried (m)

Scroll across to see the full chart.

Source: Wizz Annual Report, 2018.

Of course, the shares aren’t without risk.

We’ve seen easyJet and Ryanair both warn the market of headwinds in recent months, proof that investing in airlines is unlikely to be a one-way ticket.

Business and consumer travel tends to ebb and flow with the wider economy, and that variability could be amplified by the group’s exposure to emerging markets. Growth in these countries can come in fits and starts.

While rivals own the majority of their planes outright, Wizz’s are 100% leased. That frees up capital in the good times, but since finance costs need to be paid whatever the weather, it does bring extra risk.

Still, we think Wizz deserves recognition for its sound execution, and is an interesting option for those looking to play the long game.

It’s worth noting that there’s no dividend on offer, and the stock trades on 14 times expected earnings, around 7% above the average since the shares were first listed for trading in 2015.

Find out more about Wizz

Standard Chartered – banking on Asia

Young woman using phone for banking

I was once told that “if you want exposure to an economy, buy a bank”. The logic is straightforward enough. When an economy is booming, businesses and consumers borrow, loans are repaid and banks make money. When economies are in trouble companies and individuals are more likely to default – costing banks money.

So Standard Chartered is perhaps a good way to get exposure to some of the world’s fastest growing economies. The majority of revenue is generated in Asia, courtesy of strong positions in China and India, with sizeable contributions from Africa and the Middle East too.

The global Corporate & Institutional banking division should benefit from increasing global trade, while the more regionally specific Retail and Commercial Banking capitalises on increasing personal wealth in emerging economies.

Analysts are forecasting steady income growth out to 2021, with cost savings and increased efficiency boosting profits. We think capitalisation levels look healthy, which means the fruits of that growth are being returned to shareholders through buybacks and dividends – the current prospective yield is 2.9% in 2019.

Standard chartered operating income by geography

Scroll across to see the full chart.

Source: Standard Chartered Annual Report, 2018.

It might not be a completely steady rise though. Exposure to emerging markets is inherently riskier for a bank, and there’s regulatory risks – as Standard Chartered found when it fell afoul of US sanctions on Iran – and currency risks.

The emerging market currencies in which Standard Chartered makes loans are often volatile, rising and falling quickly as political and economic conditions shift. This can mean profitable loans quickly fall to losses.

We think Standard Chartered’s geographic mix goes some way to mitigate the currency risk – with strength in one currency making up for weakness in another. However, it’s not uncommon for emerging market currencies to move together during the times of doubt – and that can be painful.

For those who are prepared to look through potential near-term volatility, we think Standard Chartered offers an interesting option to capitalise on long term growth trends.

Find out more about Standard Chartered

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters, correct as at 20 June. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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