Why invest in Emerging Markets?

We see three key reasons why investments in Emerging Markets should form an important part of any balanced portfolio allocation: superior trend growth, supportive demographics, and comparably low debt levels. We believe that by 2025, Emerging Markets will surpass developed markets in economic output and market capitalisation.

Superior Growth Potential

The demographic bonus advantage in Emerging Markets, as measured by the dependency ratio will continue to keep labour productivity gains at a higher pace. Overall savings rate have peaked, but the gap will continue for many years to come, helping to fund domestic investments.

Growth rate of the labour force

Productivity growth

Structural currency appreciation

Sources: UN Population Division, ILO, IMF, Spinnaker Capital

Demographics Support Asset Prices

As baby boomers reach retirement age, real stock prices tend to plateau. We have seen this in Japan, and we may be seeing it in the United States. In Emerging Markets, on the other hand, the productive share of the population will continue to grow for the next thirty years or so. Due to the capital formation of these groups in the prime savings age, there is upward pressure on real equity prices.

Japan's baby boomers peaked in 1990

Log Real Equity Prices (1950=100)

Saver-Spender ratio (rhs)

US baby boomers peaked in 2005

Saver-Spender ratio (rhs)

Log Real Equity Prices (1952=100)

EM baby boomers to peak in 2045

Saver-Spender ratio (rhs)

Log Real Equity Prices (1987=100)

The Saver-Spender Ratio shows cohorts aged 35-59, as a share of groups aged 0-24 and 65+. EM equity prices are measured in US-Dollars and deflated by US CPI. Source: UN Population Division, Goldman Sachs, Morgan Stanley, Spinnaker Capital

Lower Debt Burden

In developed markets, both the corporate and household sectors are highly indebted. During the recent financial crisis, this debt burden has in part been shifted to the public sector, leading to a rapid increase in government debt. Emerging Markets, on the other hand, face lower public and private debt levels and lower fiscal constraints. This has positive implications for EM trend growth.

Private sector debt, in percent GDP

Public sector debt, in percent GDP

Public sector debt shows general government gross debt. BRIC debt is the average of Brazil, China, India and Russia, weighted by dollar GDP at market exchange rates Sources: Eurostat, IMF, Moody’s, Morgan Stanley, OECD, Spinnaker Capital

The Rising Force in the Global Economy

Today, aggregate output in Emerging Markets is about 65% of that in developed markets, and Emerging Markets capital markets are about 22% the size of those in developed markets. In 2025, we expect Emerging Markets GDP to reach 180% of developed market output. By then, Emerging bond and equity markets could surpass the capitalisation of developed markets.

1995

2015

2025

Sources: BIS, IMF, Goldman Sachs, World Federation of Exchanges, Spinnaker Capital

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EMpower

Spinnaker Capital Group is an underwriter of 'EMpower', the Emerging Markets Foundation, a not-for-profit organization that ties the resources of financial professionals world-wide with the vitality of community-based social sector initiatives in developing countries.

EMpower's mission is to provide disadvantaged young people in emerging markets countries with the resources, skills, mentorship and opportunities to improve their lives and in turn help better their families, communities, and the world around them.

EMpower believes that young people are the key to progress and stability in emerging markets countries and deserve the opportunity to achieve their greatest potential and that given the right tools, they will succeed in improving their lives and the lives of those around them, generation after generation.

EMpower also believe that cross sector partnerships are mutually beneficial for both the private and public sector and allow for an enriching exchange of perspectives and skills. To this end, EMpower strives to raise the level of awareness, involvement and investment of the financial community in philanthropy and specifically in strategies for development of healthier civil societies in the developing world.

http://www.empowerweb.org/

 

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