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.
|Country||Total Country Market Cap (USD)||Comparable to||Company Market Cap (USD)|
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.
|Year||SEA Internet Economy GMV* (USD)|
*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.
|Year||Brazil (n=53)||MSCI Emerging Markets Index (n=1,323)||MSCI World Index (n=1,584)|
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.
|Year||Revenue from India's Healthcare Sector (USD)|
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.
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.
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.
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 Ratings||Earnings Growth*||Active Return**||Dividends and Buybacks|
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 Issues||Assets Affected||Growth in Assets Affected (2018-2020)|
|Climate change / carbon emissions||$4.18T||39%|
|Sustainable natural resources / agriculture||$2.38T||81%|
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 Type||Integration||Values & Screens||Thematic||Impact|
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 Investing||General Population||Millennials|
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 PRI||Number of Signatories*||AUM Represented|
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.
ESG Investing: Finding Your Motivation
New research around ESG investing highlights that there are three common motivators for investors to invest in ESG assets.
ESG Investing: Finding Your Motivation
Environmental, social, and governance (ESG) factors are a set of criteria that can be used to rate companies alongside traditional financial metrics.
Awareness around this practice has risen substantially in recent years, but how can investors determine if it’s a good fit for their portfolio?
To answer this question, MSCI has identified three common motivations for using ESG in one’s portfolio, which have been outlined in the graphic above.
The Three Motivators
According to this research, the three primary motivations for ESG investing are defined as ESG integration, incorporating personal values, and making a positive impact.
These goals are not mutually exclusive, though, and an investor may relate to more than just one.
#1: ESG Integration
This motivation refers to investors who believe that using ESG can improve their portfolio’s long-term results. One way this can be achieved is by investing in companies that have the strongest environmental, social, and governance practices within their industry.
These companies are referred to as “ESG leaders”, while companies at the opposite end of the scale are known as “ESG laggards”. From a social perspective, an ESG leader could be a firm that promotes diversity and inclusion, while an ESG laggard could be a company with a history of labor strikes.
To show how ESG integration may lead to better long-term results, we’ve compared the performance of the MSCI ACWI ESG Leaders Index with its standard counterpart, the MSCI ACWI Index, which represents the full opportunity set of large- and mid-cap stocks across developed and emerging markets.
The MSCI ACWI ESG Leaders Index targets companies that have the highest ESG rated performance in each sector of its standard counterpart. The result is an index with a smaller number of underlying companies (1,170 versus 2,982), and a relative outperformance of 7.9% over 156 months.
#2: Incorporating Personal Values
ESG investing is also a powerful tool for investors who wish to align their financial decisions with their personal values. This can be achieved through the use of negative screens, which identify and exclude companies that have exposure to specific ESG issues.
To see how this works, we’ve illustrated the differences between the MSCI World ESG Screened Index and its standard counterpart, the MSCI World Index.
The MSCI World ESG Screened Index excludes companies that are associated with controversial weapons, tobacco, fossil fuels, and those that are not in compliance with the UN Global Compact. The UN Global Compact is a corporate sustainability initiative that focuses on issues such as human rights and corruption.
#3: Making a Positive Impact
The third motivation for using ESG is the desire to make a positive impact through one’s investments. Also known as impact investing, this practice enables investors to merge financial gains with environmental or social progress.
Investors have a variety of tools to help them in this regard, such as the MSCI Women’s Leadership Index, which tracks companies that exhibit a commitment towards gender diversity. Green bonds, bonds that are issued to raise money for environmental projects, are another option for investors looking to drive positive change.
ESG Investing For All
With various angles to approach it from, ESG investing is likely to appeal to a majority of investors. In fact, a 2019 survey found that 84% of U.S. investors want the ability to tailor their investments to their values. Likewise, 86% of them believe that companies with strong ESG practices may be more profitable.
Results like these underscore the high demand that U.S. investors have for ESG investing—between 2018 and 2020, ESG-related assets grew 42% to reach $17 trillion, and now represent 33% of total U.S. assets under management.
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