Investing in Emerging Markets: Overlooked and underpriced?

With Selma you invest into a globally diversified portfolio that consists of investments in different sectors, industries, and countries. This portfolio has proven in the past to be the most effective one.

Today, we are going to dive into one crucial part of a global portfolio: the world of emerging markets. We will dig deeper into their past performance and explore what the future might hold.

What are emerging markets?

The Emerging markets represent around 17% of the global market capitalization and thus the global market portfolio. Emerging markets are countries on the fast track to economic development.

They're not yet as economically developed as countries like the USA or Switzerland, but their population and economies are growing quickly. This is also the reason why they are interesting for investors, particularly if you invest for the long run. 

With Selma, we cover the emerging markets with ETFs (exchange traded funds) that track the entire world of Emerging Markets.  This covers a range of different Emerging Markets countries with 1000+ different companies, including world known brands like Samsung, Tencent or Alibaba across the following regions:

• Asia: Includes rapidly growing economies like China (the largest emerging market), India, Indonesia, South Korea, Malaysia, Philippines, Taiwan or Thailand. These countries are known for their expanding middle class and increasing use of technology.
• Latin America: Countries like Brazil, Chile, Colombia, Peru and Mexico are key here. They're rich in natural resources and have strong agricultural and mining sectors.
• Eastern Europe and the Middle East: This group includes economies like Saudi Arabia, United Arab Emirates, Kuwait or Qatar known for its energy resources, and Turkey. Poland, Czech Republic, Hungary or Greece are also part of this group, with more varied economic activities. After the war with Ukraine and due to sanctions on the Russian Economy, Russian investments have been removed from the index in 2022.
• Africa: South Africa and Egypt are notable for their natural resources and a growing consumer market.

Source: : https://www.msci.com/our-solutions/indexes/emerging-markets (3.1.2024)

Emerging markets make up a large portion of the world’s population and landmass but have yet a smaller presence in global market capitalisation. This implies significant growth potential. They account for about 85% of the global population and cover 80% of the land area, yet they're still catching up in terms of their share of the global economy. 

While investing in these markets can offer higher growth potential, it also comes with higher risks due to factors like political changes and economic fluctuations. For investors looking to diversify and willing to navigate these risks and investing long term, emerging markets can be a valuable addition to their portfolio.

Their past performance: A bump, after a rapid growth

In the first decade of the new millennium, emerging markets were the stars of the global economy, with countries like China and India experiencing explosive growth. It was a great time for investors, who saw these markets consistently outshine more developed economies.

But after 2010, the growth in emerging markets began to cool down. The once rapid pace was bogged down by economic headwinds and currency challenges. Global events such as political tensions and health crises further dampened the optimistic outlook, culminating in what many investors referred to as a 'lost decade'.

Looking back long-term (+30 years) the emerging markets have performed exceptionally well, while short-term they have been behind their expectations. Especially for investors, who joined after COVID have yet to wait for growth. They haven't seen the big profits that used to be common in these markets.

Emerging markets have stumbled, in large part due to China’s performance (the second-largest economy globally and the largest emerging markets economy). Recently, these markets have been more about patience and waiting for things to turn around, rather than quick success. 

A promising outlook: Emerging markets, the engine of the future

The secret of investing is thinking and acting long-term rather than chasing quick riches. Therefore, it is worth looking at the numbers and facts, which prove that emerging markets hold a big potential and are currently still slightly undervalued.

Read here how Selma detects if investments are cheap or expensive aka measuring the over- or undervaluations, and thus increases your investment into emerging markets.

Let's take a look at the far future:

In 2050, the world's population is projected to reach 9.7 billion, with nearly all the growth happening in emerging markets, especially in Asia and Africa. Each new person represents a potential customer for businesses worldwide. 

According to a recent PwC report, the world economy could more than double in size by 2042, far outstripping population growth, thanks to continued technology-driven productivity improvements and the rapid growth of emerging markets. These markets are expected to grow around twice as fast as advanced economies on average.

This growth is set to significantly transform the global economic landscape. China has already surpassed the US in GDP by purchasing power parity and may become the largest economy by market exchange rates before 2030. India could rise to second place by 2050, and Indonesia may advance to fourth, surpassing economies like Japan and Germany. By 2050, six of the seven largest economies could be from emerging markets, including Vietnam, projected to be one of the fastest growing. The EU27's share of world GDP might fall below 10% by 2050.

In summary, the global economic landscape is shifting significantly, with emerging markets set to play a pivotal role. The latest PwC report projects that by 2050, these markets, especially the E7 (the seven countries which have the highest economic performance in the class of emerging economies) economies, will drive substantial global GDP growth, far outpacing the G7 nations (a group of major industrial democracies: Canada, France, Germany, Italy, Japan, the UK, and the USA, influential in shaping global economic policy). This trend underscores the increasing importance and potential of emerging markets as key players in the global economy.

What does this mean for long-term global investors?

Stick to your plan, invest globally, and avoid emotional decisions. Even though emerging markets have had their ups and downs, history shows that periods of slower growth can be great opportunities to build wealth.

In summary, investing in emerging markets offers a promising future. Stay committed to your long-term strategy, and you can benefit from global growth, demographic changes, and economic shifts. In the world of investing, patience and a clear vision are the keys to success.