Why Everyone Should Have Emerging Market Equities in their Portfolio
Increase standard of living, faster technology adoption, and the decline of the dollar is going to boost Emerging Market Equities this decade.
Image Courtesy: The Culture Trip
Equities have been in a volatile period thanks to the war in Ukraine, inflation, uncertainty about Fed actions, and China’s crackdown on the country’s tech companies. Here on Armchair Banker, we have talked about what to buy during these turbulent times (here, here, and here). Part of your portfolio should also have emerging market equities. Here is why:
Rise of consumer power outside of the West: Consumer spending is increasing and this increase is happening outside of the West. Per WealthX, as shown below, some of the largest wealth markets have been outside of the West (as of 2019).
Source: CNBC
As you can see some of the largest growth of high net worth individuals come from frontier market nations. This high growth of wealth over the years means that more consumer power is going to increase for citizens living in these nations.
Increase technology penetration: Emerging markets have had some of the fastest smartphone penetration in the world. As you can see below countries with the highest smartphone usage come from the emerging world. China and India’s smartphone markets are the largest in the world, way ahead of the US smartphone market.
Top 10 SmartPhone Markets:
Remaining 10 largest smartphone markets:
Source: Newzoo
Markets like India, the Philippines, and Nigeria have a very low smartphone penetration. Meaning that these nations have a long way to go in terms of smartphone penetration. Thanks to smartphone penetration emerging market nations have been faster to adopt mobile payments, ride-hailing, online grocery and food delivery, mobile e-commerce, and crypto. This is the reason why companies like Sea Limited, Mercado Libre, JD.com, Alibaba, Tencent, and Pinduoduo have seen huge gains during the 2010s before the bear market and China’s crackdown began during the summer of 2021.
The coming decline of the Dollar: The demand for the dollar is clearly on the decline. Thanks to US sanctions countries are looking at other ways of trading and investing without the US Dollar. This has accelerated thanks to Western sanctions on Russia. Some developments include:
Russia demanding the EU pay for Gas in Euros
India and Russia creating a Ruble-Rupee payment system to bypass US sanctions
Finally one of the biggest news to come out; Saudi Arabia is interested in selling oil to China in Yuan.
As diverse currencies are being used for international trade and investment, demand for dollars will go down. It is not just international trade and investment. Many central banks in Latin America, Africa, and Russia are considering increasing the share of the Chinese Yuan as reserves in their Central Bank. Many of these central banks have been dumping the Dollar and US Treasuries in exchange for Gold and Yuan.
As the Dollar goes down, many emerging market companies that have borrowed in Dollars now can pay back their debt easily due to their Dollar-denominated debt going down in value. Also, the Dollar’s performance is inversely related to the performance of emerging market equities. As shown below when the Dollar is strong emerging market equities underperform the S&P 500. But when the Dollar is weak EM equities outperform their US counterparts. Basically, a weaker dollar correlates with a stronger performance of emerging markets equities.
Source: Putnam
There is a lot more to be optimistic about when it comes to emerging markets. Younger demographics, educated population, focus on climate and ESG, and brain gain from Western immigrant populations moving back to their countries in emerging markets and the global south to start amazing businesses. We are also seeing an increase in trade relationships, creation of trade blocks, decentralization, using their own currencies, and a changing global geopolitical landscape where Eurasia, once the bedrock of global civilization, is making a comeback.
Last but not least, this is not a story about just China. China’s rise has been miraculous and has created so much wealth for its citizens. Ever since its opening in 1979, in 40 years the country has transformed itself from a poor agrarian nation to an industrial and technological powerhouse. But the story of this decade (or even this century) is going to be the rise of economic prosperity and technological adoption of the rest of the global south. This part of the world includes emerging Asia, Africa, Latin America, Eastern Europe, and other frontier markets. This boom in wealth and tech innovation is going to create the next wave of investment opportunities.
During the 2010s, we witnessed the rise of the FAANG stocks. Facebook, Amazon, Apple, Netflix, and Google (one can also add Microsoft) soared during the 2010s. In the 2010s we also saw how streaming, e-commerce, search, and connecting with friends and family became part of our everyday life. In the 2020s, FAANG stocks are going to come from crypto (which we have discussed here, here, here, and here) and emerging market consumer technology. Technology is already engrained in everyday peoples’ lives in emerging economics. As the income of these populations, trade between these nations, economic decentralization, and technology adoption accelerates, expect the next wave of FAANGs to come from emerging economies. Now is the time to invest in this booming space.
What I write here is not investment advice. I write these for educational and informational purposes. Please consult a professional before investing. Do your own research. Investing involves risk.
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