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.