The transformation of emerging markets - Chetan Sehgal, portfolio manager of Templeton Emerging Markets Investment Trust

Emerging markets such as South Korea (pictured) are pivotal players in the fourth industrial revolution, particularly in the production of semiconductors, says Sehgal (file image). Picture: Getty Images/iStockphoto.

“In recent years, several new-economy sectors have emerged as key growth drivers.”

The landscape of emerging market economies, along with the companies operating within them, has undergone a remarkable transformation over the past 35 years. Previously, emerging markets were often characterised as a disparate mix of commodity exporters and low-cost manufacturers. Today they play a pivotal role, contributing to 65 per cent of the world’s gross domestic product, with the International Monetary Fund predicting this to increase further in the coming years.

Key reasons driving the change include evolving policymaking to make emerging markets more resilient, a material shift in economic activity from being a source of raw materials and cheap labour, towards being driven by consumption and technology, and lastly, and perhaps the most compelling, emerging market companies “leapfrogging” traditional business models set by their developed market counterparts through the use of innovation and technology.

In recent years, several new-economy sectors have emerged as key growth drivers, significantly affecting global economic dynamics. Notable areas include the advancement of internet and proliferation of devices that also enable greater commerce, advancement in semiconductors, the thrust towards renewable energy and consequently electrification of many industries including automobiles, and the use of computational power to unleash productivity and better outcomes.

Chetan Sehgal, portfolio manager of Templeton Emerging Markets Investment Trust. Picture: contributed.

The composition of the MSCI Emerging Markets Index reflects this development. New economy stocks now wield greater influence within the index, overshadowing the cyclical, capital-intensive old economy stocks. This shift also mirrors the ongoing transition in emerging markets.

The new economy in emerging markets

Emerging markets have become dynamic hubs for technological innovation and sustainable growth. These economies are home to some of the most exciting investment opportunities, including those in semiconductors, electrification of transport, and the green revolution including renewable energy and battery storage systems.

Emerging markets are pivotal players in the fourth industrial revolution, particularly in the production of semiconductors. The demand for semiconductors is projected to surge due to their critical role in driving artificial intelligence (AI) applications and the Internet of Things. South Korea and Taiwan, with their semiconductor giants, exemplify this trend.

Emerging market companies have raced ahead in the development of electric vehicles (EVs) and battery technology, and governments have catalysed growth by fast-tracking necessary infrastructure. These pioneers are shaping the future of transport, reducing reliance on fossil fuels, and promoting sustainable mobility.

National commitments to reduce carbon emissions have fuelled the demand for renewable energy. Emerging markets are at the forefront of this green revolution. Solar panels, wind turbines, and other renewable energy technologies are being adopted to meet the world’s growing electricity needs.

The power of consumption

Consumption patterns in emerging economies are equally important driven by favourable demographics, premiumisation trends, and more recently, digital transformation. The “next billion” middle-class consumers are expected to emerge from emerging markets, driving consumption growth. Premiumisation—where consumers opt for upgraded versions or luxury goods—is a significant trend. Brands that cater to this demand stand to benefit.

Online platforms, logistics infrastructure, and secure payment systems have enabled the growth of e-commerce and digital services. Emerging markets are embracing digital consumption, from online shopping to streaming entertainment.

A new global trade landscape

The dynamics of global trade are undergoing a profound transformation, driven by several critical factors. The interplay of geopolitical tensions and technological advancements, particularly in areas like AI and advanced semiconductor production, is reshaping trade dynamics. Heightened supply-chain vulnerabilities have prompted countries to re-evaluate their dependencies.

Nations are actively diversifying their trade relations and safeguarding their supply chains. The United States, European Union, and Japan are strategically realigning their supply networks and reinforcing bilateral ties with trusted allies. Several emerging markets are beneficiaries of this de-risking approach as they offer viable solutions for manufacturers seeking to diversify their supply chains and mitigate risks.

Emerging markets: A resilient outlook

Despite the dynamic nature of emerging markets, several enduring themes persist. First, their structural growth potential remains superior, driven by an expanding and diverse investment universe with attractive valuations. Second, while navigating challenges such as the Covid-19 pandemic and geopolitical risks, these markets have demonstrated remarkable resilience, emphasising the potential for robust growth. Finally, strategic policy decisions, ongoing reforms, and innovation will shape the future of these economies, offering significant opportunities for economic progress and investment gains in the years ahead.

As pivotal players in the global map, emerging markets’ adaptability and growth trajectory position them as key drivers of the world economy, making them compelling investment opportunities for investors globally.

Chetan Sehgal, portfolio manager of Templeton Emerging Markets Investment Trust (TEMIT)