Valeria Vine, equity investment specialist, and Victor Kohn, equity portfolio manager, at Capital Group, comment on the trends that will define the future of emerging market investing.
Victor Kohn equity portfolio manager, Capital Group on the emerging market universe today and how far it has come compared to 35 years ago: “35 years ago two things were very different. First, the opportunity set was much smaller, and second, access to information, was much more difficult. The universe was very limited. Korea and Taiwan were not really open then. The Chinese stock market did not exist. Now those three markets account for close to two thirds of the emerging markets index. Also, developing economies at the time were much smaller. Today, emerging markets account for 40 percent of the world GDP on a nominal basis and well over 50 percent on a on a PPP basis. And of course, the majority of the population is in those markets. The opportunity set is now about eight trillion dollars – still quite small in the context of global indices, but a lot has changed.”
Valeria Vine, equity investment specialist, Capital Group on trends that will define the future of emerging markets investing: “There are several broad themes that stand out; from the acceleration of innovation and technological development such as biotechnology in China, rise in digital payments, and semiconductor manufacturing in Taiwan. There are some interesting opportunities which arise from the shifting consumption patterns and rising incomes in emerging markets especially within travel and luxury goods. In addition, the growing financialization in emerging markets continues to present opportunities within insurance across Asia, and also banking in places like India and Indonesia.”
1. Travel
Valeria Vine: “Before Covid-19, in Asia every year, 150 million people flew for the first time and only about 20 percent of the world’s population has ever been on an aeroplane. Travel is a secular growth theme and as incomes rise, people tend to travel further for longer, and also spend more. Although 2020 and 2021 have been challenging for obvious reasons, there is a lot of pent up demand for travel. We can already see this in countries that have opened up for tourism. For instance, despite the current hurricane season in the Caribbean, hotel occupancy rates are at a level much higher than you would normally observe in August and September because travel restrictions to key destinations are generally being eased.”
Victor Kohn: “What we have seen in in other countries, particularly in China, is that the domestic portion of travel has recovered quite quickly. In China, the number of flights and hotel occupancy are pretty much back to where they were before Covid-19. Although long haul and international travel is way down, that will take time to recover. We continue to be very excited about companies that are focussed on domestic and short haul travel, and that promises to be a sustained recovery for the long haul.”
2. Luxury
Valeria Vine: “A lot of growth in the luxury goods sector is driven by Asia. In the past, about 60 to 70 percent of luxury spending by Chinese consumers was done during travel. Over the last year and a half with travel restrictions in place, what we have seen in China has been a repatriation of some of that spending back to mainland. We saw a number of brands opening up new stores and certainly sales jumped the moment the restrictions were lifted locally. There’s been a change in the way people are spending and where they’re spending. But certainly they haven’t changed the amount that they spend. So although they can’t freely go on holiday, a significant portion of that spend is now at home.”
