Emerging markets have changed hugely over the last 10 years, dominated by exponential growth in China. As we head towards the start of a new decade, we ask four leading emerging markets managers how the sector will develop over the ten years to 2030 and what changes we can expect.
What will be the biggest drivers in EM over the next 10 years?
Polina Kurdyavko, head of Emerging Markets at BlueBay Asset Management - "Since the Global Financial Crisis, we have seen two main categories of EM countries coming to prominence; those abundant in natural resources, such as Russia and Kazakhstan, and those with large populations which have grown through a combination of export and domestic consumption, namely, Brazil, India, China and Nigeria. Over the next 10 years, we are likely to see a shift away from these trends."
Suhail Suleman, portfolio manager, Coronation Fund Managers - "In our view, the two biggest factors that will drive EMs over the next ten years are demographics and urbanisation. Other than China, most emerging markets still have a relatively young population profile relative to the developed world. As more and more people reach a working age, one would expect the labour force in emerging markets to swell materially. The other factor that will drive EMs is urbanisation. Forty years ago, less than a fifth of China's population lived in the country's cities; today that figure is close to 60%."
Sergey Dergachev, lead portfolio manager of Emerging Market Debt, Union Investment - "A major theme will be managing the demographic dividend in EMs. It will be important to see how the favourable demographic situation in most EMs with young populations may provide a dividend for companies; whilst also realising that it could lead to challenging situations in ageing EMs like China.
Brian Bandsma, Emerging Markets portfolio manager at Vontobel Quality Growth - "More and more, emerging markets will need to innovate to drive growth. Luckily many emerging technologies such as fintech, internet-of-things, cloud computing, etc., are leapfrog technologies that will benefit people in emerging markets more than in the developed world. Investing in these emerging technologies and the dissemination of the benefits is where investment opportunities lie."
How will the role of EMs in the world economy change over this time?
Suhail Suleman - Today EMs account for around 60% of world GDP according to IMF data (using PPP measures). Prior to the rise of China (from 1980) it was only 30%. In about five years' time, and with GDP growth of 5% from China and India, the equivalent of a UK or France is expected to be added to world GDP every two years. The "magic" of compound growth means that as they become bigger, the effect of continued growth becomes even more profound. This will fundamentally alter the makeup of the world economy, which has been dominated by the US and Western Europe ever since the industrial revolution.
Polina Kurdyavko - EM countries will become much bigger lenders to the global economy than they are today and as such "diplomacy through investment" policy followed by China could be a rulebook used by other EM economies with current account surplus, such as Middle Eastern countries and Russia. In this context, although we don't think US dollar will lose the reserve status in the next 10 years, the Chinese renminbi will probably be a currency of choice for many central bankers.
Sergey Dergachev - EM nation's role will be tested on how they will deal with challenging political and economic challenges in US and Eurozone, and their ability to form and promote intra-EM alliances and economic co-operation like partnerships in Eurasia region. The One Belt One Road project can also boost the significance of EMs in coming years. But emerging markets' roles will to a large degree still be dependent on developments in DM markets, and pose a golden opportunity but also a challenge.
What are the EMs to watch over the next 10 years?
Brian Bandsma - "China is the obvious answer, for better or worse. President Xi continues to state that he is committed to progressing toward opening up and affirming his commitment to adhering to the current world order. If the US continues to abuse its privilege as a reserve currency, it is only a matter of time before the value of the dollar starts to erode. China is now the second largest economy in the world. If China remains serious about opening up its capital account, eventually it will challenge the dollar for this position. So goes China, so goes the rest of emerging markets."
Suhail Suleman - By virtue of sheer size, the answer has to be China and India. The former is already the largest economy in the world at PPP and will likely be the largest by market prices just over a decade from now at current growth rates. This is already having an impact on global politics and the strategic tension with the US is unlike to subside. Should India manage to maintain a 5-7% growth rate for a decade, it may generate output equivalent to that of today's Germany by then.
Polina Kurdyavko - "Many countries with the fastest population growth are not even currently represented in emerging market indices, let alone global ones. These countries are truly in the ‘frontier' basket. Investing on a case-by-case ‘special situations' type of methodology may be most appropriate. Today it may seem farfetched to consider meaningful investments in Tanzania, Democratic Republic of Congo or Ethiopia, but investors should always remain alive to the benefits of being the first mover."