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An Investing Megatrend: How Emerging Wealth is Shaping the Future

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Globalisation is a rising tide that lifts all boats.

In an increasingly connected world, countries are engaging with global markets more than ever before. As a result, global wealth is shifting towards emerging markets. This megatrend—a global trend with sustained impacts—is profoundly influencing everyday life, society, and business.

Shifting Economic Power

Today’s infographic from iShares by BlackRock explains how emerging markets are classified, along with which countries are growing the fastest—and how investors can follow the money.

BlackRock-Emerging-Markets Global Wealth

What Is An Emerging Market?

Every economy goes through five distinct stages of growth:

  1. Traditional Society: Based on primary industries, such as subsistence farming.
  2. The Pre-Conditions of Take-off: Spread of technology creates a more productive agricultural economy.
  3. Take-off: Industrialisation begins, and technological breakthroughs occur.
  4. Drive to Maturity: More complex manufacturing, and large-scale infrastructure investment takes place.
  5. Age of Mass Consumption: Urban society and a tertiary industry dominate, as disposable income grows.
  6. Source

    Emerging markets fall into the transitory stages between ‘Take-off’ and ‘Drive to maturity’ as their economies modernise. Today, such countries offer lots of promise, but also come with a range of challenges:

    • Pro: Greater return potential, growing middle class, increasing consumption
    • Risk: Political instability, lack of infrastructure, lack of market access

    Between 2000–2018, emerging markets’ share of global wealth has more than doubled from 10% to 24%. China is a major player in this transformation.

    China’s Economic Might

    China’s impressive trajectory from agricultural economy to global superpower cannot be ignored. The nation is on track to overtake the U.S. in terms of gross domestic product (GDP, nominal) by the year 2030.

    Year🇨🇳 China GDP🇺🇸 U.S. GDP
    2000$2.2T$12.6T
    2010$6.1T$15T
    2018$10.8T$17.8T
    2020E$16T$20.2T
    2030E$26.5T$23.5T
    2040E$36.6T$28.3T
    2050E$50T$34.1T

    China’s enormous growth has a ripple effect on its GDP composition. A more affluent middle class is buying higher-priced discretionary goods—such as cars and electronics—boosting the country’s domestic consumption.

    Investors must keep an eye out for other emerging markets that are emulating China’s example.

    One Piece Of the Puzzle

    China is just one case study—several other economies are also making strides on the world stage. Each country brings unique advantages, but also barriers to overcome.

    CountryReal GDP Growth (2019E)StrengthsWeaknesses
    🇮🇳 India7.4%✔ Rapidly growing economy
    ✔ Vast working-age population
    ✘ Red tape
    ✘ Lack of infrastructure
    🇨🇳 China6.2%✔ Good infrastructure
    ✔ High R&D spending
    ✘ Ageing population
    ✘ High debt
    🇮🇩 Indonesia5.1%✔ Cheap labour
    ✔ Diversifying economy
    ✘Wide income gap
    ✘ Lack of infrastructure
    🇲🇽 Mexico2.5%✔ Integrated with global economy
    ✔ Cheap and qualified labour
    ✘ Political unrest
    ✘ Reliant on U.S. ties
    🇧🇷 Brazil2.4%✔ Diversifying economy
    ✔ Strategic location
    ✘ High production costs
    ✘ Inflation
    🇳🇬 Nigeria2.3%✔ High FDI
    ✔ Diversifying economy
    ✘ Political unrest
    ✘ Lack of infrastructure
    🇷🇺 Russia1.8%✔ Natural resources
    ✔ Educated workforce
    ✘ Political unrest
    ✘ Lack of FDI
    🇹🇷 Turkey0.4%✔ Cheap labour
    ✔ Strategic location
    ✘ Political unrest
    ✘ Red tape

    Source: Global Finance Magazine

    With these major emerging markets in mind, how can investors tap into the global wealth shift?

    Where Are the Opportunities?

    There are several avenues for an investor to play into this megatrend: structural solutions, consumer goods, and international investment.

    Structural solutions

    Emerging markets are increasingly gaining access to technology. Growth in connectivity is closely linked with improved productivity, and many countries are ripe for a surge in online users.

    However, much can still be done to speed up technological adoption, such as boosting 3G/4G network volume and coverage, and lowering the cost of data and smartphones to be more economical.

    By helping solve some of these structural constraints through technological innovation, investors can tap into the economic growth of emerging markets.

    Consumer goods

    As disposable income increases, a sizeable middle class will seek out products that elevate the quality of life. In India, domestic consumption is estimated to hit $6 trillion by 2023—four times its 2018 level.

    The region’s spending will likely be propelled by higher-priced goods, as well as a wider variety of choices across food, transport, and fitness categories.

    Global brands that plan to expand into emerging markets, or companies with a proven track record in these areas, are potential winners for investment.

    International investment

    Last but not least, investors can identify local winners in emerging wealth markets, through active or passive investing.

    An active investment strategy would be to directly buy into individual company stocks, listed on a country’s stock exchange. Meanwhile, a passive investing strategy would be to seek out exchange-traded funds (ETFs) covering specific markets, and/or sectors within emerging markets. Many of these are also listed on major exchanges.

    Diversifying either or both strategies across two or more countries can help mitigate risk. Investors can also choose index funds that broadly encompass all emerging markets.

    As countries climb the economic ladder, the emerging wealth shift continues to gain momentum. By staying attuned to these macro changes, investors may unlock long-term growth from emerging markets.

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Technology

Visualizing the Size of Amazon, the World’s Most Valuable Retailer

Amazon’s valuation has grown by 2,830% over the last decade, and the tech giant is now worth more than the other 9 largest U.S. retailers, combined.

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Visualizing the Size of the World’s Most Valuable Retailer

As brick-and-mortar chains teeter in the face of the pandemic, Amazon continues to gain ground.

The retail juggernaut is valued at no less than $1.4 trillion—roughly four times what it was in late 2016 when its market cap hovered around $350 billion. Last year, the Jeff Bezos-led company shipped 2 billion packages around the world.

Today’s infographic shows how Amazon’s market cap alone is bigger than the nine biggest U.S. retailers put together, highlighting the palpable presence of the once modest online bookstore.

The New Normal

COVID-19’s sudden shift has rendered many retail outfits obsolete.

Neiman Marcus, JCPenney, and J.Crew have all filed for bankruptcy as consumer spending has migrated online. This, coupled with heavy debt loads across many retail chains, is only compounding the demise of brick-and-mortar. In fact, one estimate projects that at least 25,000 U.S. stores will fold over the next year.

Still, as safety and supply chain challenges mount—with COVID-19 related costs in the billions—Amazon remains at the top. It surpasses its next closest competitor, Walmart, by $1 trillion in market valuation.

How does Amazon compare to the largest retailers in the U.S.?

10 Largest Public US Retailers*Market Value July 1, 2020Market Value July 1, 2010 Normalized % Change 2010-2020Retail Revenue
Walmart$339B$179B90%$514B
Costco$134B$24B458%$142B
Amazon$1,400B$50B2,830%$140B
The Kroger Co.$26B$13B107%$118Be
Walgreens Boots Alliance$36B$26B38%$111B
The Home Depot$267B$47B466%$108B
CVS$84B$40B112%$84B
Target$60B$37B64%$74B
Lowe's$102B$29B251%$71B
Best Buy$23B$14B59%$43B
Combined value of retailers (without Amazon)$1,071B

Source: Deloitte, YCharts
*Largest public US retailers based on their retail revenue as of fiscal years ending through June 30, 2019, e=estimated

With nearly a 39% share of U.S. e-commerce retail sales, Amazon’s market cap has grown 2,830% over the last decade. Its business model, which aggressively pursues market dominance instead of focusing on short-term profits, is one factor behinds the rise.

By the same token, one recent estimate by The Economist pegged Amazon’s retail operating margins at -1% last year. Another analyst has suggested that the company purposefully sells retail goods at a loss.

How Amazon makes up for this operating shortfall is through its cash-generating cloud service, Amazon Web Services (AWS), and through a collection of diversified enterprise-focused services. AWS, with estimated operating margins of 26%, brought in $9.2 billion in profits in 2019—more than half of Amazon’s total.

Amazon’s Basket of Eggs

Unlike many of its retail competitors, Amazon has rapidly diversified its acquisitions since it originated in 1994.

Take the $1.2 billion acquisition of Zoox. Amazon plans to operate self-driving taxi fleets, all of which are designed without steering wheels. It is the company’s third largest since the $13.7 billion acquisition of organic grocer Whole Foods, followed by Zappos.

Accounting for the lion’s share of Amazon-owned physical stores, Whole Foods has 508 stores across the U.S., UK, and Canada. While Amazon doesn’t outline revenues across its physical retail segments—which include Amazon Books stores, Amazon Go stores, and others—physical store sales tipped over $17 billion in 2019.

Meanwhile, Amazon also owns gaming streaming platform Twitch, which it acquired for $970 million in 2017. Currently, Twitch makes up 73% of the streaming market and brought in an estimated $300 million in ad revenues in 2019.

Carrying On

Despite the flood of online orders due to quarantines and social distancing requirements, Amazon’s bottom line has suffered. In the second quarter of 2020 alone, it is expected to rack up $4 billion in pandemic-related costs.

Yet, at the same time, its customer-obsessed business model appears to thrive under current market conditions. As of July 1, its stock price has spiked over 51% year-to-date. On an annualized basis, that’s roughly 100% in returns.

As margins get squeezed and expenses grow, is Amazon’s growth sustainable in the long-term? Or, are the company’s strategic acquisitions and revenue streams providing the catalysts (and cash) for only more short-term success?

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Markets

What’s At Risk: An 18-Month View of a Post-COVID World

The WEF surveyed 347 risk analysts to uncover the most likely post-pandemic threats—and no area from the economy to the environment is untouched.

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What’s At Risk: An 18-Month View of a Post-COVID World

As the world continues to grapple with the effects of COVID-19, no part of society seems to be left unscathed. Fears are surmounting around the economy’s health, and dramatic changes in life as we know it are also underway.

In today’s graphic, we use data from a World Economic Forum survey of 347 risk analysts on how they rank the likelihood of major risks we face in the aftermath of the pandemic.

What are the most likely risks for the world over the next year and a half?

The Most Likely Risks

In the report, a “risk” is defined as an uncertain event or condition with the potential for significant negative impacts on various countries and industries. The 31 risks have been grouped into five major categories:

  • Economic: 10 risks
  • Societal: 9 risks
  • Geopolitical: 6 risks
  • Technological: 4 risks
  • Environmental: 2 risks

Among these, risk analysts rank economic factors high on their list, but the far-reaching impacts of the remaining factors are not to be overlooked either. Let’s dive deeper into each category.

Economic Shifts

The survey reveals that economic fallout poses the most likely threat in the near future, dominating four of the top five risks overall. With job losses felt the world over, a prolonged recession has 68.6% of experts feeling worried.

RankEconomic Risk%
#1Prolonged recession of the global economy68.6%
#2Surge in bankruptcies (big firms and SMEs) and a wave of industry consolidation56.8%
#3Failure of industries or sectors in certain countries to properly recover55.9%
#4High levels of structural unemployment (especially youth)49.3%
#6Weakening of fiscal positions in major economies45.8%
#7Protracted disruption of global supply chains42.1%
#8Economic collapse of an emerging market or developing economy38.0%
#16Sharp increase in inflation globally20.2%
#20Massive capital outflows and slowdown in foreign direct investment17.9%
#21Sharp underfunding of retirement due to pension fund devaluation17.6%

The pandemic has accelerated structural change in the global economic system, but this does not come without consequences. As central banks offer trillions of dollars worth in response packages and policies, this may inadvertently burden countries with even more debt.

Another concern is that COVID-19 is now hitting developing economies hard, critically stalling the progress they’ve been making on the world stage. For this reason, 38% of the survey respondents anticipate this may cause these markets to collapse.

Social Anxieties

High on everyone’s mind is also the possibility of another COVID-19 outbreak, despite global efforts to flatten the curve of infections.

RankSocietal Risk%
#10Another global outbreak of COVID-19 or different infectious disease30.8%
#13Governmental retention of emergency powers and/or erosion of civil liberties23.3%
#14Exacerbation of mental health issues21.9%
#15Fresh surge in inequality and social divisions21.3%
#18Anger with political leaders and distrust of government18.4%
#23Weakened capacity or collapse of national social security systems16.4%
#24Healthcare becomes prohibitively expensive or ineffective14.7%
#26Failure of education and training systems to adapt to a protracted crisis12.1%
#30Spike in anti-business sentiment3.2%

With many countries moving to reopen, a few more intertwined risks come into play. 21.3% of analysts believe social inequality will be worsened, while 16.4% predict that national social safety nets could be under pressure.

Geopolitical Troubles

Further restrictions on trade and travel movements are an alarm bell for 48.7% of risk analysts—these relationships were already fraught to begin with.

RankGeopolitical Risk%
#5Tighter restrictions on the cross-border movement of people and goods48.7%
#12Exploitation of COVID-19 crisis for geopolitical advantage24.2%
#17Humanitarian crises exacerbated by reduction in foreign aid19.6%
#22Nationalization of strategic industries in certain countries17.0%
#27Failure to support and invest in multilateral organizations for global crisis response7.8%
#31Exacerbation of long-standing military conflicts2.3%

In fact, global trade could drop sharply by 13-32% while foreign direct investment (FDI) is projected to decline by an additional 30-40% in 2020.

The drop in foreign aid could also put even more stress on existing humanitarian issues, such as food insecurity in conflict-ridden parts of the world.

Technology Overload

Technology has enabled a significant number of people to cope with the impact and spread of COVID-19. An increased dependence on digital tools has enabled wide-scale remote working for business—but for many more without this option, this accelerated adoption has hindered rather than helped.

RankTechnological Risk%
#9Cyberattacks and data fraud due to sustained shift in working patterns37.8%
#11Additional unemployment from accelerated workforce automation24.8%
#25Abrupt adoption and regulation of technologies (e.g. e-voting, telemedicine, surveillance)13.8%
#28Breakdown of IT infrastructure and networks6.9%

Over a third of the surveyed risk analysts see the emergence of cyberattacks due to remote working as a rising concern. Another near 25% see the threat of rapid automation as a drawback, especially for those in occupations that do not allow for remote work.

Environmental Setbacks

Last but certainly not least, COVID-19 is also potentially halting progress on climate action. While there were initial drops in pollution and emissions due to lockdown, some estimate there could be a severe bounce-back effect on the environment as economies reboot.

RankEnvironmental Risk%
#19Higher risk of failing to invest enough in climate resilience and adaptation18.2%
#29Sharp erosion of global decarbonization efforts4.6%

As a result of the more immediate concerns, sustainability may take a back seat. But with environmental issues considered the biggest global risk this year, these delayed investments and missed climate targets could put the Earth further behind on action.

Which Risks Are of the Greatest Concern?

The risk analysts were also asked which of these risks they considered to be of the greatest concern for the world. The responses to this metric varied, with societal and geopolitical factors taking on more importance.

VC_What's-at-Risk-v5-supp

In particular, concerns around another disease outbreak weighed highly at 40.1%, and tighter cross-border movement came in at 34%.

On the bright side, many experts are also looking to this recovery trajectory as an opportunity for a “great reset” of our global systems.

This is a virus that doesn’t respect borders: it crosses borders. And as long as it is in full strength in any part of the world, it’s affecting everybody else. So it requires global cooperation to deal with it.

——Gita Gopinath, IMF Chief Economist

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