Megatrends: Emerging global wealth

In the last twenty years, developing economies have been lifted by the rising tide of globalisation and manufacturing shifting to Asia. The emergence of a sizeable, aspirational middle class, particularly in China, has made it an important destination for global companies. We continue to expect emerging markets to offer significant growth potential for domestic and multinational firms.

Learn more about the megatrends shaping our future of economies, business and society.

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. You may not get back the amount originally invested.

China: A force to reckon with

Two decades of unprecedented growth has lifted China's per capita GDP from a meagre 8% of US per capita GDP in 2000 to roughly 30% this year.¹ This rapid growth has been enabled by significant infrastructure investments, support for an export-focused manufacturing base and increased spending on innovation. In turn this has resulted in persistent growth in household incomes; the World Bank notes that China alone is set to add one billion people to the global middle class between 2005-2030. It is not surprising then that China has been a key source of growth for companies exposed to Chinese consumers (e.g. luxury brands, autos, smartphones).

China's foray abroad

China's significant economic progress has coincided with its foray abroad. Consider the approximate $1 trillion (all amounts given in USD) Belt and Road Initiative as China seeks to invigorate infrastructure and trade routes across south Asia and other parts of the emerging world. A new breed of Chinese companies are increasingly capturing market share at home and venturing overseas. This is a natural progression of an economy that has been steadily moving up the value curve in infrastructure, manufacturing and technology sectors (see chart below).

Source: ¹IMF World Economic Outlook Update, Jan 2019.

Other emerging markets
come to the party

Elsewhere, genuine reform can unlock potential in India, which benefits from an expanding labour pool (the working age population is set to grow by almost 14% by 2030E, compared to a -3% decline for China).² As cost inflation in China pushes manufacturing jobs elsewhere, neighbouring southeast Asian economies are benefiting (e.g. Vietnam, Bangladesh). Another advantage for emerging markets is the ability to lead from advanced economies and adopt cheaper and better technologies to boost productivity (e.g. clean energy, communication). For instance, Mexico's mobile penetration is at 90% while fixed-line penetration has plateaued at 16%.³

Source: ² United Nations World Population Prospects: The 2018 Revision. ³ International Telecommunication Union, Oct 2018.

Number of companies in the top 2,500 R&D spenders globally

Source: European Commission, data from 2013-2017. Dec 2018.

What are the investment opportunities?

An increasing number of domestic emerging market companies are on the cusp of a new phase of value creation. Cost leadership is giving way to technological expertise. Regional players are turning into national dominators. Suppliers to global companies are building their own brands. We see opportunities in identifying local winners and innovators with exposure to growing themes.

The emerging middle class

For investors who are unable to access domestic emerging markets, there are opportunities to consider among global firms that can cater to local tastes and compete effectively with local competition. Primarily, the emerging middle class is poised to drive demand for global brands most consumer categories – from toothpaste and nappies to luxury bags and apparel.

Solving structural problems

Elsewhere, opportunities may arise for companies that solve structural constraints: these economies need commodities, infrastructure and access to new technologies. They need to satisfy rising demand for food, clean energy, cheaper healthcare, faster telecom networks etc. and global companies will likely be part of the solution.

Investing in emerging global wealth with BlackRock & iShares

Our range of thematic funds offer a way for investors to tap into megatrends, which we believe gives investors exposure to companies with structurally higher earnings growth, which in-turn could drive stronger investment returns over the longer term.