The Joseph Group

Future Developments of the Developing World

May 18, 2018

To Inform:  

Aaron Filbeck, CFA, CAIA, CIPM; Portfolio Manager

 

Aaron Filbeck, portfolio manager, recently traveled to New York City to attend an investment conference. One of the keynote presentations focused on the future of emerging markets, essentially dividing future growth drivers into three themes:

  1. Technological Disruption. The rise of mobile payments is changing how sectors do business. In emerging markets, wallets are quickly becoming a thing of the past in favor of consumers making payments using their smartphones. As one could imagine, this has multiple implications for the banking sector and consumer behavior.  Here in the U.S., we definitely see the impact of eCommerce, but in emerging markets, the trend is accelerating even faster.  Underdeveloped banking systems mean companies using financial technology have had an easier time gaining market share and the lack of traditional retail stores mean online consumer companies are skipping over brick and mortar retail altogether.
  2. “Three Chinas?” We often hear the term “China,” but in an economic sense, China can really be divided into three regions: Eastern China, Manufacturing China, and Western China. All three of these regions have vastly different cultures and levels of wealth, with eastern China being the wealthiest and Western China being the poorest and most rural. In the future, potential growth should come from the poorer regions of Western China.
  3. Not All Countries in Emerging Markets are the Same. Countries like India and China appear to have a longer-term positive trajectory due to positive political reforms and technological innovation. On the other hand, countries like Brazil and Russia will likely struggle under their current political environments.  When investing in emerging markets, politics matter.

Innovation is happening across the world, but the difference between emerging markets and the U.S. is in the fact that many emerging market companies have the advantage of starting in areas of the world where there is less competition.  This provides these companies with the potential to grow faster than companies in more developed countries (like the U.S.).  Valuations are also attractive, creating a compelling long-term investment opportunity.

Last year, emerging markets was the best performing asset class and the trend of outperformance continued in the 1st quarter of 2018.  In recent weeks, a rising dollar has created more volatility in emerging stocks, but when we look at the trends, we believe emerging markets are an important tool for achieving long-term growth objectives in client portfolios.