2024 Global Investment Conference: Emerging markets providing opportunities for institutional investors

Emerging markets remain the key growth driver of the global economy, he said, noting roughly 70 per cent of global growth comes from this part of the world. Looking forward, this growth is expected to accelerate. “This is not the asset class that it was. I say, ‘these aren’t your granny’s emerging markets.’ There’s been a fundamental shift in investment opportunity set within the asset class.”

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Roughly 10 to 15 years ago, the emerging markets space was dominated typically by cyclical, commoditized and industrial-type earnings that were priced below quality, said Ness, noting the asset class has transformed to one with new industry, technology, innovation, leadership and research and development capabilities. It now has world-class semiconductor manufacturing in North Asia, a dominant electric vehicle supply chain in China and software-as-a-service businesses within Latin America and India that are helping global companies stay competitive in this Second Industrial Revolution. Indeed, he said even rich countries in the Middle East are pursuing a reform agenda, which is creating a much wider opportunity set for investors.

As opportunities expand in this market, it holds a lot of untapped potential, particularly in light of its growing mass-consuming middle class, he added, noting there is under-penetration in this market with respect to a large range of goods and services.

Emerging markets allow investors to tap into the companies that are building the new global digital architecture. “These are emerging market investment opportunities. So while the likes of NVIDIA Corp. has grabbed all the artificial intelligence hype, much of the work [it’s] doing is dependent on the components — the R&D and the manufacturing capacity of companies within the [emerging markets] asset class. And again, I think that’s under-appreciated by the markets today.”

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In terms of valuations, he noted emerging markets space is currently at historically low levels compared to developed markets. “For instance, if you consider the price-to-earnings ratio, emerging markets are trading at approximately 11 times forward earnings, consistent with their 15- to 20-year history. . . . This stands in stark contrast to the U.S., which is trading at 22 times earnings. One could argue this is justified by the significant growth in earnings and return on equity within that asset class.”

Additionally, this asset class is under-levered at the sovereign, household and corporate levels, Ness added, noting since they had limited capacity, emerging markets didn’t upend their fiscal balance sheets during the coronavirus pandemic. It’s upward-sloping yield curves are aligned with the traditional notion of borrowing short and lending long, he said, noting they didn’t experiment with negative interest rates. Rather, they adopted appropriate fiscal policies and their banks operate in fairly orderly oligopolistic structures, so they’re very profitable.

“[They’re] also, most critically, . . . serving a very under-penetrated consumer credit economy. . . . True innovation, R&D leadership globally, is now coming from the developing part of the world.”