Great companies can come from anywhere, and emerging markets have more than their fair share. We’ve identified three megatrends we expect to give birth to tomorrow’s superstars—and that no globally inclined portfolio should be without.
The case for emerging equities has improved. Bellwether gauges of collective emerging-market (EM) economic growth—including China’s power, steel and cement production and even Macau casino visits—have ticked up (Display), as have earnings expectations. Fiscal and capital-market reforms continue to advance across various countries. To top it off, EM valuations remain enticing relative to those in developed markets.
There are still plenty of challenges. We’re watching closely for potential stresses arising from normalizing US interest rates and possible new US trade barriers. But not all emerging economies or companies are equally vulnerable, if at all. Fundamentals are diverging, making for rich pickings for resourceful investors who can separate signal from noise.
So, after distilling these macroeconomic concerns, we continue to find diverse opportunities. Here are three megatrends that should shape the EM investing scene for years to come.
PREMIUMIZATION—OR NOTHING BUT THE BEST
The growing EM middle class continues to show a voracious appetite for premium-priced, upscale products. This “trading up” phenomenon is particularly pronounced in China (Display), where upper-middle and affluent urban households are expected to account for roughly half of total urban real disposable income by 2020—twice their share in 2010. It’s also gaining momentum in India.
Premiumization is driving Chinese demand for foreign luxury goods, from US-made Steinway pianos to South Korea’s AmorePacific skin care. But it’s also boosting the sales of mass-market consumer goods such as Japan-made Merries disposable diapers and Starbucks coffee.
It’s also come to the food aisle. Chinese are eating far more pork, chicken and beef than their forebears. And as they migrate to cities, they are buying more of it prepackaged from a store. Companies like Smithfield Foods (owned by Chinese company WH Group) and Walmart Stores’ Sam’s Club in China are tapping into this trend.
Meanwhile, local mass-market brands such as Bright Dairy & Food packaged milk and Nongfu Spring beverages are also repositioning to higher-quality offerings and emphasizing the quality of their ingredients in their marketing. As premium domestic brands gain consumers’ trust, they are increasingly winning share from foreign incumbents.