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Emerging Markets
Emerging market equity investing and the role of geographical boundaries EAAU
Valeria Vine
Investment Specialist
Richard Carlyle
Investment Specialist
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As emerging markets continue their rise towards becoming one of the key drivers of global growth, improved capital and information flow have brought to the fore alternative ways of investing in the asset class. In this paper, we look into the possibility of broadening the emerging market opportunity set beyond the traditional boundaries of geographical domicile, and focusing instead on successful companies that are taking advantage of key secular trends in developing countries.


 


The paradigm shift in emerging markets


One of the biggest developments when it comes to investing in emerging markets over the past few years has been the inclusion of China A-shares into global indices. Index providers such as MSCI have been adding China exposure to benchmarks, amid a continued push by the Chinese authorities to open the country’s financial markets to foreign investors.


Given the size of China’s financial markets, this inclusion has inevitably led to concerns that the emerging market opportunity set is becoming too skewed towards a single country. Investors using passive strategies to gain exposure to emerging markets could inherit concentration risks as they find their portfolios being determined by index weightings rather than the search for good investment ideas. Consequently, it may be worth considering a different approach to capturing investment opportunities within emerging markets. 


Another key development has been an increased reliance on global supply chains. Nowadays, companies tend to have some combination of customers, suppliers and production lines in multiple countries, some of which are likely to be in emerging markets. Despite this, investors often remain tied to asset allocation approaches that define a portfolio’s exposure by where its companies are headquartered, rather than where and how they do business. While traditional domicile-based approaches have been tried and tested over the years, these methods may potentially misrepresent the fundamentals that drive companies, as well as the risks and opportunities within portfolios.


Two industries that are underrepresented by purely domestic emerging market companies are luxury goods and health care, both of which are seeing rapid demand growth from emerging markets. For example, the revenues of French luxury goods group LVMH are heavily influenced by emerging markets, particularly China, where there is no equivalent in the local market. Meanwhile, emerging markets make up the largest geographical segment for AstraZeneca, having generated 35% of the UK pharmaceutical company’s total product sales in financial year 2019.  Not only that, but the segment is rapidly growing, with China leading the way with a 29% year-on-year increase in product sales in 2019.1 


 


1. Source: AstraZeneca


Risk factors you should consider before investing:

  • This material is not intended to provide investment advice or be considered a personal recommendation.
  • The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment.
  • Past results are not a guide to future results.
  • If the currency in which you invest strengthens against the currency in which the underlying investments of the fund are made, the value of your investment will decrease.
  • Depending on the strategy, risks may be associated with investing in fixed income, emerging markets and/or high-yield securities; emerging markets are volatile and may suffer from liquidity problems.


Valeria Vine is an investment specialist at Capital Group. She has 11 years of industry experience and has been with Capital Group for four years. Prior to joining Capital, Valeria worked as a management consultant at Ernst & Young. Before that, she was a senior consultant at FactSet. She holds a master's degree in banking and international finance from Cass Business School and a bachelor's degree in economics from University of Nottingham. She also holds the Chartered Financial Analyst® designation. Valeria is based in London.
 

Richard Carlyle is an equity investment director and vehicle portfolio manager at Capital Group. He has 38 years of investment industry experience and has been with Capital Group for 14 years. Prior to joining Capital, he was head of equities for Henderson Investors. Before that, he was a fund manager for Morgan Grenfell Asset Management, a pension fund manager for British Petroleum, and an analyst for Equity & Law Life Assurance Society. He holds a bachelor’s degree in economics with honors from Leicester University. Richard is based in London.


 

Past results are not a guarantee of future results. The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment. This information is not intended to provide investment, tax or other advice, or to be a solicitation to buy or sell any securities.

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. All information is as at the date indicated unless otherwise stated. Some information may have been obtained from third parties, and as such the reliability of that information is not guaranteed.