The world has not stood still while we reconsider our relationship with the European Union
It’s official – ‘Brexit’ has been named as the Collins Dictionary word of the year for 2016. A 3,400% upsurge in usage has propelled Brexit to the top spot, ahead of ‘Trumpism’ and ‘hygge’ (the latest lifestyle trend to emerge from Denmark).
This result is hardly surprising given the prominence that ‘Brexit’ has had across both traditional and social media throughout the year. Although we do not wish to downplay the magnitude of the referendum, it is also important to retain a sense of perspective.
UNDERSTANDING EMERGING MARKETS
Investors tend to categorise countries at the core of world affairs as being ‘Developed’ and at the periphery as ‘Emerging’ despite the fact that the latter contribute a greater share to global gross domestic product (GDP) than their developed counterparts.
It is not always clear how to define an emerging market economy. For example Taiwan, a country at the cutting edge of technological processes, has less debt, lower unemployment and higher GDP than Portugal. It is however classed as emerging, whereas Portugal, a world-leading cork exporter, remains part of developed market indices.
For example roads, railways, power and mobile telecoms. China has just finished the sixth ring road around Beijing and is about to start on the seventh with plans to merge Beijing with neighbouring urban areas to create a “supercity” of 130 million people, greater than the shrinking population of Japan. A decade ago, China had no high speed rail network and now has more than the European Union.
2. Political reform
The recent election of Narendra Modi as Prime Minister of India is driving enormous change to encourage business growth, improve corporate governance, open up banking to the whole population, allow and encourage overseas investment inflows previously seen as a threat to inefficient indigenous businesses, and clamp down on endemic corruption. India is now forecast to grow faster than China.
3. Growth of the consumer
This will be the biggest contributor in the long term. Real incomes are rising fast in emerging markets at typically between 5% and 10% annually. China has 770 million working people, of whom 146 million are regarded as middle class urban consumers earning an average US$11,700 annually, while at the other end of the scale, 387 million of the population are rural working class earning an average of only US$2,000 on an annual basis. (Source: China NBS, CNN Politics, Goldman Sachs).
The countries of the world have never been as clearly split as the labels indicate. However, in our view, as a group it is those currently labelled as ‘emerging’, that will from here drive the greatest growth the world has ever experienced. IMF data confirms that China became the world’s largest economy in 2014 surpassing the United States that had enjoyed this status since the 1870s.
INVESTING IN EMERGING MARKETS
As tens of millions in countries such as China, India and Indonesia move from the country to the city, the disposable incomes of their respective populations rise and they become consumers, moving up the value scale, from basic food and clothing to more discretionary items such as cars, holidays and eating out. A comparison of China with the United States demonstrates the changes that take place in consumer habits as an economy becomes wealthier. At the lower end of the value scale people strive to dress to “look more beautiful” and to “eat better”, while further up the scale they can afford to “have more fun” such as eating out and holidays, along with looking after their well-being, for example, by going to the gym.
Consumer focused businesses are obvious beneficiaries of this, from mobile phones, to restaurants, to gaming, and luxury goods such as watches, handbags and premium spirits. A leading driver of this is the internet, with China already the world’s leading online market place by volume and where Alibaba is the dominant player and challenging Amazon for overall global size.
Travel is a huge area of growth and the number of new aircraft deliveries in emerging markets is around double that of developed markets. Major beneficiaries of this include airlines, aircraft manufacturers, aircraft leasing companies, hotels and branded luggage producers such as Samsonite. UK listed Standard Chartered Bank is now in the process of negotiating a joint venture in the aircraft leasing market with a Chinese state-owned company.
There is no doubt that the number of world-leading emerging market companies including Alibaba (China), Samsung (South Korea) and Taiwan Semiconductor will grow. However, companies based all around the world will benefit from this, including many in the UK such as: Bunzl, supplier of catering, tableware and hygiene items to hotels and restaurants; Diageo, which produces beverages including premium spirits; and Smith & Nephew, which specialises in wound management, orthopaedics and sports medicine, which are important for well-being.
Emerging market shares have performed very strongly in 2016 after a number of challenging years, yet it is impossible to forecast what 2017 as a standalone year will bring. There will always be bumps along the way not least political ones, however, consumer-led economic growth is here to stay in emerging markets.
Issued by Adam & Company Investment Management Limited (Adam), which is authorised and regulated by the Financial Conduct Authority. Adam is registered in Scotland number SC102144. Financial Services Firm Reference Number 141831. Registered Office: 25 St Andrew Square, Edinburgh EH2 1AF.
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