Emerging markets – Worthy of consideration

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In this report we provide an overview of emerging markets and suggest why they warrant an allocation within a global portfolio. We focus on the 11 funds in the AIC Global Emerging Markets sector, although there are a further 25 closed-end country-specific and regional emerging market funds available. In aggregate, emerging markets offer the prospects of higher economic growth and are trading on more attractive absolute and relative valuations compared with developed markets; however, there are important country-specific features that need to be taken into consideration. Historical data show that emerging markets tend to outperform during periods of US dollar weakness.

Potential benefits of investing in emerging markets

Developing economies generally exhibit higher growth than those of advanced countries. Factors for the increased output include:

• Urbanisation – ongoing migration from rural to urban living is driving demand for residential real estate development and infrastructure projects.

• Rapidly rising middle classes has led to increasing demand for higher-quality goods and services, including healthcare insurance and wealth management products. Positive demographic trends in emerging markets compare favourably with developed countries that have aging populations.

• Environmental policies – climate change has moved up the global agenda, which has led to the development of, among other industries, renewable energy, battery storage, electric vehicles and waste & water treatment.

• Digitisation – emerging markets are embracing new technologies domestically and are providing digital products and services internationally by utilising their young, educated workforces and having lower operating costs.

• Home to world-class companies such as the world’s largest semiconductor foundry Taiwan Semiconductor Manufacturing Company (TSMC).

• Geopolitics and deglobalisation – changing dynamics in trading relationships are leading to significant shifts in supply chains, transportation and logistics. As an example, Mexico is an important beneficiary of nearshoring due to increasing tensions between the US and China.