PI Partnership – Newton Investment Management


Ian Smith is a global emerging markets portfolio manager at Newton Investment Management


EMERGING MARKETS: THREE DRIVERS OF LONG-TERM GROWTH


In this article, we discuss three key drivers of sustainable growth in emerging markets and the importance of strong corporate governance.


The emerging world is where we often find the most underserved demand for a wide range of goods and services that many in the developed world take for granted. Despite that, emerging markets represent little more than 10% of global equity indices, with the data consistently demonstrating that these markets are underserved and underrepresented. Their predicament highlights the signifi- cant opportunity to ride with the tailwinds around rising real incomes and urbanisa- tion, which are powerful structural growth stories in many emerging mar- kets, as well as the chance to harness the adoption of technologies around clean energy, electrification, digitisation and healthcare, to name a few. In our view, there may be no more fertile ground for patient and sustainably deployed capital to have a positive effect on people’s lives, and to ultimately reward investors with attractive returns over the long term. As mentioned above, there are a plethora of statistics that reveal the extraordinary level of underserved needs in the develop- ing world which, as responsible investors, we think it key to address. Put simply, it is in the developing world where we most


48 | portfolio institutional | May 2022 | issue 113


urgently need the deployment of large- scale solutions, and hence where compa- nies whose products and services result in positive outcomes for the customer or society at large when consumed (or ‘solu- tion providers’ as we call them) will find their most exciting growth opportunities. For investors serious about investing responsibly in emerging markets for the long term, we think it useful to break down the opportunities into three broad areas – earth, health and wealth – that we expect to drive much of the future growth potential in these regions. Below we assess each area.


Earth


The developing world offers the largest addressable market opportunity for envi- ronment-oriented solutions. These are the most populous regions of the world, where relatively faster rates of economic growth will increasingly draw on the world’s finite resources. Only around 25% of carbon emissions in 2020 were produced by MSCI World Index countries, compared to roughly 60% in the equivalent Emerging Markets Index countries, with most of the rest coming from Frontier Markets Index countries (economies which are less estab- lished than emerging markets). China and India are currently the first and third-largest carbon emitters globally, and their CO₂ per unit of nominal GDP in 2019 was three and four times larger than that of the US, respectively.


Clearly, it is


in the developing world where the biggest addressable market opportunity is for renewable energy and other clean tech- nology solutions. It is also in the develop- ing world where positive change is most urgently needed if we are to meet Paris Accord global-warming targets. China consumes roughly 1.7 times more electric- ity than the next largest consumer, the US. Hence, it is hardly surprising to see more renewable-energy installations in China than anywhere else. Between 2018 and 2020,


net new wind and solar photovoltaic capacity additions in China


came to 240 gigawatts, which is 43% of net global additions and 1.6 times those of the US, the EU and the UK combined.


Health Sadly, it is the case that child mortality rates in low-and middle-income countries are eight times higher than in high-in- come countries. It is a similar story if you look at maternal mortality, or child stunt- ing, or a range of related statistics. There are opportunities for companies from dif- ferent industries to play their part in addressing these depressing anomalies, ranging from pharmaceutical companies to contract research organisations, hospi- tals


and insurance companies. The


growth runways can be huge for compa- nies operating in countries where out-of- pocket health spending is high, and where health spending per capita is low. In many emerging economies, populations are also ageing, and access to doctors, hospi- tal beds, essential medicines and clean water and sanitation is insufficient.


Wealth According to the International Finance Corporation, roughly 65 million compa- nies, or 40% of global micro, small and medium enterprises (MSMEs) in develop- ing countries, have insufficient access to appropriate financing, which equates to a $5.2trn (£3.9trn) shortfall of credit every year. These MSMEs are key sources of for- mal employment in their respective econ- omies. The World Bank estimates that they create seven out of 10 jobs in emerg- ing markets. Meanwhile, over one billion people globally are ‘unbanked’. There are vast opportunities for those companies that can responsibly bridge these gaps in credit and basic financial services. There are also significant opportunities for com- panies that can promote the development of productive infrastructure, whether related to transport, logistics or telecom- munications, for example. It is estimated that emerging markets will invest an aver- age of $2.2trn (£1.6trn) annually on infra-


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