Where future growth lies, and why

2023 was, of course, supposed to be the year that promised that a recovery in China and a buoyant India, facing off against a stuttering US (complete with weakening dollar) and inflation-ravaged Europe, would finally bring the ‘lost decade’ of emerging markets investment to a close. Yet the great comeback simply hasn’t materialised, and the tech-fuelled US continues to outperform as it has for more than a decade.

For investors thinking in time horizons of years and decades, the dizzying heights reached recently by the likes of Apple and Nvidia might mask a fundamental long-term truth. The world’s economic centre of gravity is, still, shifting inexorably East, with India and China alone forecast to contribute more than three times to incremental global GDP over the next five years than the US, according to IMF forecasts. Yet valuations on global stock markets still imply a future of unfettered US dominance. India, despite a strong recent run and buoyant local capital markets, could comfortably squeeze every single one of its publicly listed companies into the valuations that Apple and Nvidia enjoy. China, following a renewed foreign backlash in recent months, is a strikingly consensus underweight for active global managers.

One could credibly question the grouping together of two countries, of such global significance, that are facing such different dynamics – China, still outpacing other major economies but facing a difficult transition away from its fixed capital investment-driven growth model; and India, just beginning its period of demographic dividend, with a market-friendly policy regime in place. For all but the largest investment institutions, ‘Emerging Markets’ represents a useful shorthand for those higher growth countries that are expected to contribute a disproportionate share of global growth in the coming decades; and which will have redefined the shape of the world economy by the middle of this century. And while a single-country approach may occasionally be worthwhile in the case of Emerging Markets ‘giants’ like China, India and arguably Brazil, many of the most promising international markets, such as Vietnam, Bangladesh and Indonesia, demand investor attention but cannot yet justify standalone allocations.

However, there are no guarantees that an homogenous, top-down investment approach to the different countries driving this paradigm shift will be successful.

In India an enormous consumer class is beginning to emerge, not just gaining spending power across basic staples categories but becoming more sophisticated in their wants and needs. Penetration of toothpastes and soaps is above 90% but consumption of products such as cosmetics, apparel and packaged food is just getting started. In China, perhaps the most dynamic businesses are those in ‘hard tech’ categories such as electric vehicles and healthcare, where decades of hefty R&D spend have enabled domestic businesses to compete with western imports on quality, while exploiting ‘China scale’ to be far more affordable for local customers. Focusing on the domestic consumer provides a better chance for investors not only to capture superior emerging market growth, but also to minimise exposure to the damage to trade caused by an increasingly protectionist West.

By focusing on companies which are proactively addressing the developing world’s greatest challenges – decarbonisation being a prime example – investors can not only look towards a long runway of demand growth, but also build in a relative resilience to macroeconomic bumps on the road, and a high chance of policy support amongst more interventionist governments. Alongside decarbonisation, providing basic staples such as affordable healthcare services and personal care products to Indian households also falls firmly into this category.

For companies that are addressing these development challenges, strategies centred on volume and affordability, leading to truly mass-market adoption, are the best pathway to both long-term financial returns and positive social outcomes. For investors, measuring and managing for the positive social impact of these businesses provides not just visibility into the consequences of their own capital allocation decisions, but also assurance that their holdings remain focused on the vast long-term prize. It is clear that making measurable improvements to the lives of the six billion people living in developing countries represents an incredibly powerful financial opportunity, which domestically biased Western investors would be unwise to ignore.