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Emerging Markets: A Growing Set of Opportunities

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BlackRock Emerging Markets

Emerging Markets: A Growing Set of Opportunities

With growth portfolios becoming increasingly focused on China, investors may develop a tendency to overlook the broader emerging markets universe.

To shed a light on some lesser-known opportunities, this infographic from BlackRock explores the evolving landscapes of Southeast Asia, Brazil, and India.

Putting Opportunity Into Perspective

Emerging markets often exhibit lower price/earnings ratios (P/E) when compared to developed markets. While this may suggest that the region is attractively priced, investors can also view emerging markets from a relative size perspective.

Here’s how the market capitalisations of several emerging markets compare to some of the biggest names in tech.

CountryTotal Country Market Cap (USD)Comparable toCompany Market Cap (USD)
India$2,111BApple$1,981B
Brazil$711BFacebook$746B
Thailand$428BTesla$401B
Indonesia$381BNvidia$334B
Philippines$270BNetflix$221B

As of September 2020. Source: CEIC, Ycharts

Investors often focus on tech companies when seeking long-term growth, but with valuations at their highest levels since the dot-com bubble, uncertainty could begin to rise.

That’s where emerging markets can come into play. A country such as Brazil, which contains over 400 listed companies, may offer enhanced returns and diversification when compared to a single company. To learn more, here’s a closer look at three emerging markets opportunities that might be flying under your radar.

1. Southeast Asia: A Rising Digital Economy

Southeast Asia (SEA), which includes Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam, is quickly emerging as the next digital giant. The region is currently home to an online population of 400 million people, a 53% increase from 2015.

With so many people going online, companies such as Grab, a local ride-share provider, have accumulated millions of new users. This spells good news for investors, with SEA’s internet economy expected to reach a gross merchandise value (GMV) of $309B by 2025.

YearSEA Internet Economy GMV* (USD)
2015$32B
2019$100B
2020 projected$105B
2025 projected$309B

*GMV is the total value of merchandise sold through a customer-to-customer exchange site.
Source: Google, Temasek, Bain & Company

Favourable demographics are also contributing to this growth. The region is expecting 50 million entrants to its middle class by 2022 and has an average age of just 30.2 years. That’s roughly 10 years younger than the UK, and 18 years younger than Japan.

Furthermore, this growing cohort of wealthier consumers is already embracing technology. Ecommerce, a subsector of SEA’s internet economy, has added 100 million new users over the past 5 years, with GMV increasing from $5 billion in 2015 to $62 billion in 2020.

2. Brazil: Improvements in Gender Diversity

Gender diversity has been a historical weak point for Brazilian companies, but female representation in the country has been improving. Here’s how the percentage of women on corporate boards differs between Brazil, emerging markets, and developed markets.

YearBrazil (n=53)MSCI Emerging Markets Index (n=1,323)MSCI World Index (n=1,584)
20165.8%9.0%20.3%
20178.4%10.2%20.4%
20188.0%11.2%21.6%
201911.9%12.1%25.0%
202013.7%13.0%26.2%

Source: MSCI

Brazil surpassed the emerging markets average in 2020 thanks to increased awareness and initiatives by its financial sector. Brazil’s B3 exchange, for example, was the first stock exchange in the Americas to sign the Women’s Empowerment Principles, an initiative by UN Women.

Greater female representation is welcome news for both investors and society alike. Research from the Boston Consulting Group found that companies with above-average diversity tended to be more innovative, generating a greater share of revenue from recently launched products.

3. India: Promising Opportunities in Healthcare and Real Estate

As part of its National Health Protection Scheme, India’s government is looking to provide 500 million people with government-sponsored health insurance. If progress is kept on track, health sector revenues could increase at a compound annual growth rate (CAGR) of 18%, making it one of the world’s fastest growing markets in the world.

YearRevenue from India's Healthcare Sector (USD)
2016$140B
2017$160B
2020 Projected$280B
2022 Projected$372B

Source: IBEF

Achieving this goal will require participation from both the public and private sectors. For example, India’s government has pledged to increase public health spending from 1.1% of GDP in 2018, to 2.5% by 2025. Additionally, it allows 100% foreign direct investment (FDI) in projects such as hospitals.

India is adopting a similar strategy for real estate, which has struggled to keep up with growing demand. In India’s top eight cities, the housing deficit amounts to over 3 million units.

 
Indian Real Estate
Income GroupDemandSupplyDeficit
Lower income1,982,00025,0001,957,000
Middle income1,457,000647,000810,000
High income717,000351,000366,000
Total4,156,0001,023,0003,133,000

Source: IBEF

To accelerate development, India’s government has allowed 100% FDI in residential and retail developments since 2018. Analysts believe that the country’s real estate market could become the third largest in the world by 2030.

There’s More Than Meets The Eye

Over the span of a few years, China has grown to comprise nearly 40% of the MSCI Emerging Markets Index—but this doesn’t mean that China should receive all of the attention from investors.

With almost 30 countries to explore, China and the opportunities discussed above are just a subset of what emerging markets have to offer. For growth-minded investors, giving this diverse region a closer look could be rewarding.

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Investor Education

Visualizing The World’s Largest Sovereign Wealth Funds

To date, only two countries have sovereign wealth funds worth over $1 trillion. Learn more about them in this infographic.

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Visualized: The World’s Largest Sovereign Wealth Funds

Did you know that some of the world’s largest investment funds are owned by national governments?

Known as sovereign wealth funds (SWF), these vehicles are often established with seed money that is generated by government-owned industries. If managed responsibly and given a long enough timeframe, an SWF can accumulate an enormous amount of assets.

In this infographic, we’ve detailed the world’s 10 largest SWFs, along with the largest mutual fund and ETF for context.

The Big Picture

Data collected from SWFI in October 2021 ranks Norway’s Government Pension Fund Global (also known as the Norwegian Oil Fund) as the world’s largest SWF.

The world’s 10 largest sovereign wealth funds (with fund size benchmarks) are listed below:

CountryFund NameFund TypeAssets Under Management (AUM) 
🇳🇴 Norway Government Pension Fund Global SWF$1.3 trillion
🇺🇸 U.S.Vanguard Total Stock Market Index FundMutual fund$1.3 trillion
🇨🇳 ChinaChina Investment CorporationSWF$1.2 trillion
🇰🇼 Kuwait Kuwait Investment Authority SWF$693 billion
🇦🇪 United Arab EmiratesAbu Dhabi Investment Authority SWF$649 billion
🇭🇰 Hong Kong SARHong Kong Monetary Authority Investment PortfolioSWF$581 billion
🇸🇬 SingaporeGovernment of Singapore Investment CorporationSWF$545 billion
🇸🇬 SingaporeTemasek SWF$484 billion
🇨🇳 ChinaNational Council for Social Security Fund SWF$447 billion
🇸🇦 Saudi ArabiaPublic Investment Fund of Saudi Arabia SWF$430 billion
🇺🇸 U.S.State Street SPDR S&P 500 ETF TrustETF$391 billion
🇦🇪 United Arab EmiratesInvestment Corporation of DubaiSWF$302 billion 

SWF AUM gathered on 10/08/2021. VTSAX and SPY AUM as of 09/30/2021.

So far, just two SWFs have surpassed the $1 trillion milestone. To put this in perspective, consider that the world’s largest mutual fund, the Vanguard Total Stock Market Index Fund (VTSAX), is a similar size, investing in U.S. large-, mid-, and small-cap equities.

The Trillion Dollar Club

The world’s two largest sovereign wealth funds have a combined $2.5 trillion in assets. Here’s a closer look at their underlying portfolios.

1. Government Pension Fund Global – $1.3 Trillion (Norway)

Norway’s SWF was established after the country discovered oil in the North Sea. The fund invests the revenue coming from this sector to safeguard the future of the national economy. Here’s a breakdown of its investments.

Asset Class% of Total AssetsCountry DiversificationNumber of Securities
Public Equities72.8%69 countries9,123 companies
Fixed income24.7%45 countries1,245 bonds
Real estate2.5%14 countries867 properties

As of 12/31/2020

Real estate may be a small part of the portfolio, but it’s an important component for diversification (real estate is less correlated to the stock market) and generating income. Here are some U.S. office towers that the fund has an ownership stake in.

AddressOwnership Stake
601 Lexington Avenue, New York, NY 45.0%
475 Fifth Avenue, New York, NY49.9%
33 Arch Street, Boston, MA49.9%
100 First Street, San Francisco, CA44.0%

As of 12/31/2020

Overall, the fund has investments in 462 properties in the U.S. for a total value of $14.9 billion.

2. China Investment Corporation (CIC) – $1.2 Trillion (China)

The CIC is the largest of several Chinese SWFs, and was established to diversify the country’s foreign exchange holdings.

Compared to the Norwegian fund, the CIC invests in a greater variety of alternatives. This includes real estate, of course, but also private equity, private credit, and hedge funds.

Asset Class% of Total Assets
Public equities38%
Fixed income17%
Alternative assets43%
Cash2%

As of 12/31/2020

A primary focus of the CIC has been to increase its exposure to American infrastructure and manufacturing. By the end of 2020, 57% of the fund was invested in the United States.

“According to our estimate, the United States needs at least $8 trillion in infrastructure investments. There’s not sufficient capital from the U.S. government or private sector. It has to rely on foreign investments.”
– Ding Xuedong, Chairman, China Investment Corporation

This has drawn suspicion from U.S. regulators given the geopolitical tensions between the two countries. For further reading on the topic, consider this 2017 paper by the United States-China Economic and Security Review Commission.

Preparing for a Future Without Oil

Many of the countries associated with these SWFs are known for their robust fossil fuel industries. This includes Middle Eastern nations like Kuwait, Saudi Arabia, and the United Arab Emirates.

Oil has been an incredible source of wealth for these countries, but it’s unlikely to last forever. Some analysts believe that we could even see peak oil demand before 2030—though this doesn’t mean that oil will stop being an important resource.

Regardless, oil-producing countries are looking to hedge their reliance on fossil fuels. Their SWFs play an important role by taking oil revenue and investing it to generate returns and/or bolster other sectors of the economy.

An example of this is Saudi Arabia’s Public Investment Fund (PIF), which supports the country’s Vision 2030 framework by investing in clean energy and other promising sectors.

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Investor Education

Fact Check: The Truth Behind Five ESG Myths

ESG investing continues to break fund inflow records. In this infographic, we unpack five common ESG myths.

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ESG Myths

Fact Check: The Truth Behind 5 ESG Myths

In 2021, investors continue to embrace environmental, social, and governance (ESG) investments at record levels.

In the first quarter of 2021, global ESG fund inflows outpaced the last four consecutive quarters, reaching $2 trillion. But while ESG gains rapid momentum, the CFA Institute shows that 33% of professional investors surveyed feel they have insufficient knowledge for considering ESG issues.

To help investors understand this growing trend, this infographic from MSCI helps provide a fact check on five common ESG myths.

1. “ESG Comes at the Expense of Investment Performance”

Fact Check: Not necessarily

Worldwide, ESG-focused companies have not only seen higher returns, but stronger earnings growth and dividends.

Returns by ESG RatingsEarnings Growth*Active Return**Dividends and Buybacks
Top tier2.89%1.31%0.28%
Middle tier1.35%0.12%-0.02%
Bottom tier-9.22%-1.25%-0.05%

Source: MSCI ESG Research LLC (Dec, 2020)
*Contribution of earnings growth and dividends/buybacks to active return
**Active return is the additional gain or loss compared to it respective benchmark

In fact, a separate study from the CFA Institute shows that 35% of investment professionals invest in ESG to improve their financial returns.

2. “Investors Talk About ESG But Don’t Invest In It”

Fact Check: False

Global ESG assets under management (AUM) in ETFs have grown from $6 billion in 2015 to $150 billion in 2020. In just five years, ESG AUM have accelerated 25 times.

Today, money managers are focusing on the following top five issues:

Top ESG IssuesAssets AffectedGrowth in Assets Affected (2018-2020)
Climate change / carbon emissions $4.18T39%
Anti-corruption$2.44T10%
Board issues$2.39T66%
Sustainable natural resources / agriculture$2.38T81%
Executive pay$2.22T122%

Source: US SIF Foundation (Nov, 2020)

Meanwhile, over 1,500 shareholder resolutions focused on ESG-related matters were filed between 2018-2020. Not only are investors turning to ESG assets, but they are placing higher demands on corporate responsibility.

3. “ESG Investment Strategies Eliminate Entire Sectors”

Fact Check: Not necessarily

First, not all ESG investment approaches are exclusionary.

For instance, in North America roughly 51% of ESG ETFs used an ESG integration approach as of Dec. 31, 2020. In an ESG integration approach, ESG risks and opportunities are analyzed with the goal to support long-term returns.

By comparison, values and screens approaches, which accounted for over 22% of ESG ETFs in North America may screen out specific business activities, such as alcohol or tobacco, or sectors such as oil & gas.

Percentage of ESG TypeIntegrationValues & ScreensThematicImpact
North America50.9%22.5%20.7%5.9%
Asia57.8%34.6%3.8%3.8%
Europe30.8%60.6%8.6%0.0%
Australia28.6%71.4%0.0%0.0%

Source: Refinitiv/Lipper and MSCI ESG Research LLC as of Dec 31, 2020 (MSCI Feb, 2021)

Second, companies are assessed on a sector-specific basis where ESG leaders and laggards are identified within each sector in comparison to peers. In other words, ESG doesn’t mean eliminating exposure to entire sectors. Instead, investors can choose from a range of companies based on their ESG ratings quality.

4. “ESG Investing Is Only For Millennials”

Fact Check: False

Although ESG is popular among millennials, ESG investing is being driven by the entire investor population. In 2019, one study finds that 85% of the general population expressed interest in ESG investing.

Interest in Sustainable InvestingGeneral PopulationMillennials
201985%95%
201571%84%

Source: US SIF Foundation (Nov, 2020)

Sustainable investing goes far beyond millennials—ESG disclosures are quickly becoming requirements for key industry participants, such as institutional investors and listed companies.

5. “ESG Investing is Here to Stay”

Fact Check: True

Climbing 28% in 2020 alone, over 3,000 signatories have committed to the UN Principles of Responsible Investment. As of the first quarter of 2021, 313 global organizations and 33 asset owners have been newly added.

Growth of UN PRINumber of Signatories*AUM Represented
20203,038$103.4T
20192,370$86.3T

Source: UN PRI
*As of Mar, 2020

Central to ESG’s growth is the availability of ESG investments. ESG investing has become more widely accessible—which wasn’t always the case. Over the last decade, the global number of ESG ETFs has grown from 46 to 497.

Why the Facts Matter

As ESG investments continue to play an even greater role in investor portfolios, it’s important to focus on data rather than prevailing ESG myths that are not backed by fact.

Given the recent momentum in investment returns and ESG adoption, data-driven evidence empowers investors to build more sustainable portfolios that better align with their investment objectives.

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