Public Equities

Emerging Markets Equity: Evolving & Transforming

February 2021 – 9 min read
Technological innovation, an increasingly confident consumer and a growing focus on ESG are re-shaping the long-term growth opportunity in emerging market equities.

Emerging markets (EMs) have experienced a seismic shift over the past decade. While they have traditionally been perceived as dominated by ‘old economy’ industries like low-cost manufacturing and commodity production, many EM economies have transitioned from ‘primary’ and ‘secondary’ industries toward ‘tertiary’ or service-based industries.1 This evolution is reflected in the makeup of the investible EM equities universe—new economy sectors, including consumer discretionary, information technology, communication services and health care, now account for roughly 55% of the EM benchmark index, nearly double the weighting of 10 years ago. At the same time, old economy industries like energy, materials, industrials and utilities have nearly halved in size to make up roughly 19% of the index today.2 And the change is broad-based, occurring across countries from China to India to South Africa to Brazil.

While we continue to see value in select companies across more traditional sectors, we believe this widespread transition in the EM landscape, coupled with changing consumption patterns and an increased focus on sustainability, presents a compelling long-term opportunity in EM companies that are exposed to these trends—and/or that are enablers of the change.
 

EMs Dominating Fast-Growing Sectors

While the shift toward the new economy is indeed global, EM companies are at the forefront of many of these fast-growing but highly concentrated sectors.
 

EMs Lead EV Battery Industry Growth

The electric vehicle (EV) battery industry is one example. Amid the push toward green investment globally, the EV battery sector has been one of the primary beneficiaries—thanks in large part to government subsidies for clean energy, which have helped narrow the price gap between EVs and traditional internal combustion vehicles. This in turn is driving demand higher—which is forecast to grow by 5.4x by 20253—as well as resulting in increased production volumes, improved efficiency and lower costs of production. As these dynamics continue to play out, the price gap between EVs and traditional vehicles is forecast to narrow even further, and effectively close by 20254

Mindful of the growing disruption to their traditional lines of business, auto companies across the world are also investing heavily in new EV designs, which should lead to a continued ramp-up in new model launches. Combined with the expected narrowing of the price gap, this is likely to drive EV unit sales and market penetration even higher over the next decade. In our view, this bodes well for key EV battery producers, many of which have already secured long-term supply contracts with major global auto companies.5
 

1. Primary industries involve acquiring raw materials, while secondary industries
focus on manufacturing these raw materials into products. Tertiary industries refer
to the commercial services that support the production and distribution process.
2. Source: Barings, Factset. As of September 30, 2020.
3. Source: HSBC. As of September 30, 2020.
4. Source: HSBC. As of September 30, 2020.
5. Source: McKinsey. As of 2020.

Want to read the full article?

View PDF

Michael Levy

Co-Head Emerging Equities Team

William Palmer

Co-Head Emerging Equities Team

Any forecasts in this material are based upon Barings opinion of the market at the date of preparation and are subject to change without notice, dependent upon many factors. Any prediction, projection or forecast is not necessarily indicative of the future or likely performance. Investment involves risk. The value of any investments and any income generated may go down as well as up and is not guaranteed by Barings or any other person. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Any investment results, portfolio compositions and or examples set forth in this material are provided for illustrative purposes only and are not indicative of any future investment results, future portfolio composition or investments. The composition, size of, and risks associated with an investment may differ substantially from any examples set forth in this material No representation is made that an investment will be profitable or will not incur losses. Where appropriate, changes in the currency exchange rates may affect the value of investments. Prospective investors should read the offering documents, if applicable, for the details and specific risk factors of any Fund/Strategy discussed in this material.

Barings is the brand name for the worldwide asset management and associated businesses of Barings LLC and its global affiliates. Barings Securities LLC, Barings (U.K.) Limited, Barings Global Advisers Limited, Barings Australia Pty Ltd, Barings Japan Limited, Baring Asset Management Limited, Baring International Investment Limited, Baring Fund Managers Limited, Baring International Fund Managers (Ireland) Limited, Baring Asset Management (Asia) Limited, Baring SICE (Taiwan) Limited, Baring Asset Management Switzerland Sarl, and Baring Asset Management Korea Limited each are affiliated financial service companies owned by Barings LLC (each, individually, an “Affiliate”).

NO OFFER: The material is for informational purposes only and is not an offer or solicitation for the purchase or sale of any financial instrument or service in any jurisdiction. The material herein was prepared without any consideration of the investment objectives, financial situation or particular needs of anyone who may receive it. This material is not, and must not be treated as, investment advice, an investment recommendation, investment research, or a recommendation about the suitability or appropriateness of any security, commodity, investment, or particular investment strategy, and must not be construed as a projection or prediction.

Unless otherwise mentioned, the views contained in this material are those of Barings. These views are made in good faith in relation to the facts known at the time of preparation and are subject to change without notice. Individual portfolio management teams may hold different views than the views expressed herein and may make different investment decisions for different clients. Parts of this material may be based on information received from sources we believe to be reliable. Although every effort is taken to ensure that the information contained in this material is accurate, Barings makes no representation or warranty, express or implied, regarding the accuracy, completeness or adequacy of the information.

Any service, security, investment or product outlined in this material may not be suitable for a prospective investor or available in their jurisdiction. Copyright in this material is owned by Barings. Information in this material may be used for your own personal use, but may not be altered, reproduced or distributed without Barings’ consent.