Emerging Markets: The Search For Value

The world is full of opportunities, but you have to know where to look.

As economic growth in the developed world flattens, more and more investors are seeking geographical diversification - and for good reason. For better or for worse, we’re seeing a large-scale shift away from the developed world (and especially the dollar) and towards emerging economies.

There’s plenty of blame to go around as to why this is happening, and we’ll look more deeply at the causes and effects of this “de-dollarization” in upcoming articles. But for now, let’s examine the current panorama of affairs - and how you can benefit.

The Global Economic Outlook: Why Returns in Developed Countries are Lagging

At this stage the consensus on the global economic outlook is lukewarm at best. But for the developed world, the outlook is downright gloomy. Developed countries have begun to see their markets lag as economic growth slows and volatility increases. For example, JP Morgan Research sees developed markets growing at a paltry 0.8 percent in 2023, with the U.S.'s one percent expansion balancing Europe's near-zero growth.

The fact is that high interest rates, record inflation, and general economic uncertainty abound. JP Morgan Research is betting on a U.S. recession before the end of 2023 as the S&P 500 re-tests its 2022 lows and employment starts to rise.

The IMF holds a slightly more hopeful expectation for Europe, but the message is the same: growth will stall in the developed economies, possibly for quite some time.

Exploring the Potential of Emerging Markets

It’s no secret that emerging economies are expected to drive much of the world's economic development in the coming years.

The reasoning is simple: there’s just more room for growth. Industries that in the developed world have reached a ceiling are just getting started in other places. People often point to tech as an example, but in reality numerous sectors are quickly getting off the ground in the developing world.

Adding emerging-market exposure to your portfolio can offer a powerful hedge against stagnating growth in developed economies. While the U.S. and EU languish at near one-percent growth, emerging markets could continue to expand at an attractive four-percent pace, according to the IMF.

Why Emerging Markets Can Outperform

Governments in developing economies generally seek to capitalize on their competitive advantage from lower costs and abundant labor, and often focus on policies encouraging foreign investment, leading to rapid growth.

In addition, these governments generally keep debt as a percentage of GDP lower than developed economies, giving them a structural advantage.

This advantage is especially potent in the export sector. Countries that produce goods in weaker currencies for sale in stronger-currency economies can produce strong results.

With the adoption of new technologies and increasing access to markets across the globe, emerging markets are poised to take home a larger piece of the pie in the coming years.

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Burgeoning Industries

Governments in developing countries aren’t just focused on traditional sectors like manufacturing; many emerging markets now boast extensive infrastructures allowing efficient access to capital, quality labor forces, and vibrant technology industries. Advances in automation and the increasing popularity of nearshoring have allowed companies of all sizes – from Fortune 500s to start-ups – to optimize costs more confidently than ever.

As a result, developing economic areas are experiencing an influx of new players eager to capitalize on newfound prospects, shifting economic dynamics and creating lucrative trading relationships that continue to form worldwide.

For example, Colombia boasts a rapidly growing IT industry and one of the largest shipbuilding industries outside of Asia. It's also the second-largest producer of appliances and electronics in Latin America and is a rapidly growing exporter of agricultural goods.

As global economies evolve and expand, emerging markets are already outpacing developed countries regarding financial growth. Savvy investors can capitalize on growth prospects and access untapped economic potential while mitigating the risk of focusing solely on low-growth zones.

How to Capture Returns from Growth in Emerging Markets

Of course, not all emerging markets are created equal. The world outside of the developed economies is immense, and accessing its value isn’t easy. You can’t just throw a dart at the map and hope for the best.

There are key factors that determine the success of an emerging market, such as market access, labor availability, and internal economic conditions. For example, how developed is the banking system? Can business owners access financing at reasonable rates? How about infrastructure? Can goods be easily moved throughout the country? Is there room for improvement in the infrastructure sector that could lead to value down the road? There’s no shortage of questions to answer.

The most critical step is to perform an analysis of the specific economic sector you’re targeting. In our case, agronomic factors were key - climate, soil quality, altitude, etc. etc. In terms of market access, Colombia has strong free trade agreements with the U.S. and other major imports that encompass hundreds of millions of consumers. The country also has strong agricultural traditions that have created a skilled workforce.

It can be difficult to know where to start, but by performing an in-depth analysis of the country in question, it’s easy to see that some emerging markets offer more opportunities than others.

As we go deeper into the current economic cycle, more and more investors are looking to emerging markets for the growth that is drying up in North America and Europe. By making an informed decision, you too can diversify geographically and strengthen your portfolio. Leave your contact information below to learn more.