The overall emerging markets index has experienced some challenging times in the recent past.
The underperformance of emerging markets versus global equities over the past three years has led investors to question whether the long-term prospects for emerging markets have changed.
The outlook is always evolving, but the long-term structural growth theme for emerging markets remains intact.
The long-term case for emerging markets centres on superior growth, quality companies, and the large set of diverse investment opportunities.
Superior growth
Emerging market growth is driven by attractive demographics, rising investment that helps to create higher paid jobs, leading to an expansion of the middle class, and rising consumption.
The UN projects the global population will increase by 2bn people to 9.2bn by 2050, with the majority of that increase in emerging markets.
While the global population will age, the working age population will increase to 4.25bn over the same period.
The middle class in emerging markets will also expand dramatically over this period, as investment increases the demand for labour and more people move to cities.
The urbanisation rate in emerging markets is forecast to increase from 51 per cent to 66 per cent by 2050.
As the middle class in emerging markets expands, demand for consumer goods ranging from autos and air conditioners to tourism will rise significantly.
Auto penetration in emerging markets in 2022 was 119 per 1,000 people, compared to 497 in developed markets.
Quality companies
Emerging market companies with the quality characteristics have increased over the past 15 years.
The weight of new economy sectors, which includes companies with quality characteristics, in the MSCI Emerging Market index has increased to more than 50 per cent over this period.
The weight of the old economy, including low return on capital companies, has declined to less than 20 per cent.
Diverse investment opportunities
Emerging markets are home to some of the most exciting investment opportunities, including those in the electrification of transportation and the green revolution, such as renewable energy and battery storage systems.
These companies are the enablers of the fourth industrial revolution, which will focus on general purpose technologies and artificial intelligence.
South Korea is at the forefront of these trends.
It is home to one of the world’s largest semiconductor companies, a sector that we think has a bright future.
Demand for semiconductors is forecast to grow in the coming years driven by demand for processing power to drive AI applications and the internet-of-things.
Continued technological development has led to higher silicon content per device, as well as the expansion of new end-applications (autonomous driving, generative AI), which drives continuous growth in semiconductor content.
Technology companies will drive semiconductor demand as they accelerate investments in AI.
Demand for evermore powerful semiconductors could increase dramatically in the years ahead as companies outside the technology industry also invest in customised large language models for their own use.
