Emerging markets are also maturing and becoming more robust—the development of local consumers and local demand is changing the risk profile of many emerging market investments.
“At the corporate level, which we’re all about, emerging markets look very good,” Semple says. “Not necessarily the smokestack industries or the state-owned banks. It’s all about the consumers—health care, the internet, the areas that are truly innovative, that’s where people should think about emerging markets.”
Whereas emerging market indexes were once dominated by energy and basic materials companies, today sectors like health care and technology are rising in influence.
“Commodities used to be a lot more relevant for quite a few economies in emerging markets,” Ribeiro says. “If we were looking at stock markets 10 years ago, the relevance of commodity names in those markets was a lot higher. We’ve seen the transformation happen pretty quickly. Today, these stock markets have greater exposure to consumer names and tech names. Those are now the big weight in emerging market indexes, but that wasn’t the case six to 10 years ago.”
The opportunity is especially exceptional where the rise of emerging markets consumers and cutting-edge technology are converging. Consumers are “leapfrogging” from old, analog, and fixed ways of doing business to new, digital and mobile methods.
“Consumers are making a leap straight into the online world and are spending their time shopping online; it’s actually a form of entertainment for some people,” Mathewson says. “Suddenly emerging market consumers are faced with this massive choice and price discovery that they didn’t have before. That’s why you see in some emerging markets, like China, a penetration of online retail that is much higher than it is in the U.S. We just don’t have those same ingrained behaviors.”
But the key to investing in emerging markets is to stay active and agile, McLennan says.
“If you just own an index, you’re just owning the whole index good and bad,” he says. “Oftentimes what we haven’t owned has made the difference—being out of the expensive tech stocks in the late 1990s. Being out of the BRICs when everyone else was enthusiastic. The willingness to selectively participate in markets.”