Emerging Markets, Revisited
Why we could all do well to capture exponential growth.
It is funny how we have come to define “emerging markets” when it comes to investing in equities. In the US, anything other than buying the Apples or Microsofts of this world is deemed to be a different asset class entirely. Even Europe with a history in capital markets going back hundreds of years is hardly considered worthy of attention. So, it should come as no surprise that in the MSCI World Index, entire continents such as South America, Africa, and most of Asia hardly feature. Be that as it may, if we used GDP as our measure, then the so-called emerging markets actually make up more than half of the world’s output, and growing fast.
Most of that has to do with people. By the year 2050, it is projected that there will be more than ten billion human beings in the world, and more than half will be from countries that are currently not developed, as far as our prevailing definitions go. It remains to be seen how the world will cope with the strains on resources it will take to sustain an increase in population of this magnitude. Nevertheless, there is also a huge potential consumer market in the works here. I remember talking to an equities analyst in the nineties when they were leading the IPO of Koo Koo Roo, a chain of chicken restaurants. “Imagine when they expand internationally”, he said, “and one billion Chinese people start eating just one more chicken each week”. That still makes me laugh, but the point is very clear.
It is no secret that we are going through the biggest shift in demographics the world has ever seen. Birth rates in the developed world are declining, and more people are growing older. In the emerging economies, there are more young people than ever before and this number is expected to double in the next thirty years. The average age in Africa is 19.7, in Europe it is 42.5. If the world can put these people to work and enable a transition to a thriving economic class, it could transform itself in ways not seen since the industrial revolution.
So how can we best capture this growth? Clearly, there is a difference between buying stocks in South Korea and Azerbaijan, not only in terms of size or volumes, but also because of cost. At some point it just becomes uneconomical to hold stocks in countries representing less than 5% of global output. Nevertheless, thanks to our friendly neighbourhood ETF providers, there is plenty to choose from and we can invest in thousands of individual stocks, across regions, continents, and even groupings by themes, such as “frontier markets” or “developed emerging markets”. How much? Well, just imagine when two billion people in Africa start buying electric cheese graters.