Future of emerging markets

Emerging markets (EM) are changing. Has China’s stumbling economic growth opened the door for India to take centre stage? How should EM investors think about the next ten years?

There’s certainly renewed optimism for economic growth across EM, coupled with more stable fiscal environments and lower dollar-denominated debt. Brigitte Le Bris, Head of FX and EM Debt at Ostrum AM, explained: “For many years, EM have been dependent on international flows. An investment decision started out with an analysis of the US dollar and an opinion on where we were in the global economic cycle. Today, there are notable endogenous forces within EM for investors to consider. Countries have matured and have become more autonomous, thus more financially independent, and therefore, less tied to the US dollar.”

The opportunities are clear across EM equities too. Mike Tian, Portfolio Manager, Emerging Markets Equities at WCM Investment Management, commented: “We are bullish on consumer internet companies in EM, especially outside of China. We see strong secular growth, with relatively low levels of penetration, and increasing rationality. In almost every country, the winners and losers are becoming a lot clearer, and the winners are separating themselves from the pack.

“In the mid-term we are also very interested in South Korea’s ‘Corporate Value Up initiative’ [which aims to enhance the appeal of the South Korean capital market to investors by encouraging companies to distribute more dividends]. It’s early days, but we are seeing some companies embrace it and, if they prove successful and are rewarded in the market, we can certainly see this becoming a powerful theme.”

China’s launch of a broad package of monetary stimulus measures in 2024 cheered the region’s subdued markets – at one point, the CSI 300 index of Shanghai and Shenzhen-listed shares was up nearly 30% from its February trough¹. But the jury’s out on whether there’s enough in the Chinese “big bazooka” to tackle a protracted downturn in the property market, tepid export demand, and subdued consumer spending, all of which are weighing on China’s post-Covid economic recovery².

Meanwhile, India is projected to be among the fastest growing major economies over the next decade, with GDP growth expected above 6%³. A third consecutive term for the ruling National Democratic Alliance – led by the Bharatiya Janata Party (BJP) and its leader, Prime Minister Narendra Modi – is expected to provide policy continuity and stability.

Investors will naturally be watching India and China particularly closely over the coming years. Yet we shouldn’t forget the other EM regions that have the potential to shift the global economic landscape – indeed, one of the key questions for the next 10 years is whether Latin American emerging markets will manage to solve their fiscal crises.

Moreover, while much of the hype associated with artificial intelligence (AI) has been driven by a handful of companies in the developed markets, the real opportunity in AI from a long-term investment perspective could well be in EM.

For Ji Zhang, Senior Research Analyst at Loomis Sayles, this is largely due to increased computing power, higher storage – and applications that use AI for tangible purposes. He explained: “When you think about development of new AI applications that are used in real life applications, much of the software development and architecture that’s being concepted right now is coming out of Latin America and India… So, when you think about emerging markets for AI, you’re not talking about companies that are hype type of companies. You’re talking about many companies that may enjoy years and years of structural growth because they could be the true enablers of longer-term AI adoption.”

For the winners, there’s real potential to kickstart a golden decade of innovation and growth.