Emerging Trends in Emerging Markets

The Bid – Emerging Trends In Emerging Markets

Episode Description:

In a world filled with financial uncertainties and rapidly changing economic landscapes, one thing remains clear. Emerging markets are becoming increasingly pivotal in shaping the global investment landscape.Jeff Spiegel, US head of BlackRock, megatrend International and Sector ETFs joins host Oscar Pulido to delve into specific global trends that are paving the way for emerging markets, including the intriguing concepts of supply chain rewiring, and demographic population shifts.

Sources: BlackRock Investment Institute, “Capital Market Assumptions,” 08/2023;. The Economist, “Global firms are eyeing Asian alternatives to Chinese manufacturing,” 02/20/2023;

McKinsey & Company. Lithium Mining: How New Production Technologies Could Fuel the Global EV Revolution, 4/12/22; International Energy Agency. “The role of critical minerals in clean energy transitions”, May 2021; 

World Economic Forum, “This chart shows the growth of India's economy,” 09/26/2022;

The Economic Times, “India likely to become third biggest economy behind US and China by FY28,” 10/16/2022;

The Economic Times, “India's economy likely to grow 7% in FY23: First advance estimates,” 01/07/2023;

Reuters, “India to review production incentive scheme this month-end,” 06/13/2023; Morningstar, MSCI. China constitutes 30% of the MSCI Emerging Markets Index as of 9/30/2023.

BlackRock, as of 9/30/2023;

Morningstar. The iShares MSCI Emerging Markets ex-China ETF has a YTD total return of 6% as of 09/30/2023. The iShares Core MSCI Emerging Markets ETF has a YTD total return of 3% as of 09/30/2023;

Morningstar. The iShares MSCI India ETF has a YTD total return of 7% as of 09/30/2023. The iShares MSCI South Korea ETF has a YTD total return of 4% as of 09/30/2023; BlackRock, as of 9/30/2023.

Written Disclosures in Episode Description:

This content is for informational purposes only and is not an offer or a solicitation. Reliance upon information in this material is at the sole discretion of the listener.

For full disclosures go to Blackrock.com/corporate/compliance/bid-disclosures

TRANSCRIPT:

<<THEME MUSIC>>

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido.

In a world filled with financial uncertainties and rapidly changing economic landscapes, one thing remains clear. Emerging markets are becoming increasingly pivotal in shaping the global investment landscape.

This topic has been a point of great interest for us since our enlightening conversation with Emily Fletcher in London during the summer. You might remember Emily is a portfolio manager in BlackRock's fundamental equities business. Emily and I discussed the BlackRock investment institute's bullish outlook predicting that emerging market equities would significantly outperform their developed market counterparts over the next decade. But the question remains, how will this outlook play out in the near and long term?

Today I'm joined by Jeff Spiegel, US head of BlackRock, megatrend International and Sector ETFs. Jeff is going to help us explore the multitude of factors contributing to this anticipated outperformance. We'll delve into specific global trends that are paving the way for emerging markets, including the intriguing concepts of supply chain rewiring, and demographic population shifts.

Jeff, thank you so much for joining us on The bid.

Jeff Spiegel: Pleasure to be back with you.

Oscar Pulido: So, Jeff, as you know, over the summer, I spoke with Emily Fletcher. Emily's a portfolio manager in our fundamental equities business and she invests in emerging markets and was quite constructive on, the asset class. The BlackRock Investment Institute, has an outlook that of the next 10 years, emerging market equities will outperform, developed market equity, so they're quite constructive as well.¹ So how do you see, this playing out in emerging markets? What's your outlook on the asset class?

Jeff Spiegel: Oscar, as you and I have discussed in the past, one of the privileges of getting to work here at BlackRock is we work with some of the greatest investors in the world. In Emily's case, a fundamental equity investor, at the cutting edge, but it's not just our fundamental equity business or even our investment institute that's excited about the opportunity in emerging markets. It's our alternatives business, it's our systematic business, it's our index business.

Really, there's tremendous excitement all across the firm around these opportunities. There's a historical truth about emerging markets, which today has become a misconception, which is that a lot of emerging market countries are actually the smaller countries in the world. Actually, that's changed significantly.

Countries like China, India, Brazil are today some of the world's most important economies. The reason we consider them emerging markets has more to do with local equity market structure, as an example, and going forward, we actually think in the next 10 to 20 years, four out of the five largest economies in the world, markets we would consider to be emerging today. So, these are big, important economies and these emerging market countries are being driven forward by one of the things we like to talk about a lot here, which are big structural changes or mega forces we have identified five of them: digitalization and artificial intelligence, demographic divergence the transition to a low carbon economy, geopolitics and economic competition, and the future of finance.

All of these are going to play a role in propelling forward emerging markets. In particular I think we'll have the chance to talk about them today, demographics, that transition, and geopolitics because so many of these countries have favorable demographics, so many of them have access to the key resources for the climate transition and there'll be beneficiaries of increasingly, competitive geopolitics by essentially playing all sides and staying in the middle.

Oscar Pulido: You mentioned the five mega forces and one of the ones you touched on was demographic divergence. I think we read a lot about in the US in the UK, in Japan, these developed markets, how populations are getting older. So how are demographic shifts then impacting the emerging market economies? Is it the same story or is it something different?

Jeff Spiegel: It's actually quite different, so The Economist has this term I like, called AltAsia, like alternative Asian economies, that are really coming up in importance.² And a lot of these countries have incredibly favorable demographics, especially relative to, developed market countries or even China.

And just to put some numbers around that, AltAsia, think about Vietnam, Thailand, India, has a collective working age population, about 1.4 billion people.³ It's home to about 155 million people between age 25 and 54 who have a tertiary education.⁴ What's interesting is these are some of the only countries in the world where those stats are actually improving, year on year. They're not at the sort of peak, they're actually still in the early innings of that demographic growth and of that education trend.

Now, when you compare that to China, Western Europe and Japan, all three are actually shrinking in terms of working age population, and even the US is actually only staying about flat. There's a term we like to use here that demographics are destiny, because this is one of the big changes in the world that you can actually predict with a pretty good amount of certainty- how many people are in a country today? What does the birth rate look like and how are people going to age over time?

And looking at those things. A lot of emerging markets, particularly in this sort of Alt Asia cohort, present incredibly attractive opportunities that are going to be hugely important for economic growth in those nations.

Oscar Pulido: And so, on top of the demographic shifts that you just mentioned, we also hear a lot about geopolitical fragmentation we're seeing it in the world. We're seeing more economic competition. So how does this play into your long-term outlook for emerging markets?

Jeff Spiegel: So, we talked about demographics and the importance of that mega force geopolitical fragmentation, another really critical mega force that's affecting the emerging markets cohort and in a variety of different ways. So, off the bat, trade is actually growing faster between geopolitically aligned countries that have better diplomatic relationships with one another.

We are also distinct from the Cold War period, have this idea of multi-aligned states, really large economies, that are negotiating with all sides geopolitically, and they're benefiting, they're getting infrastructure support, they're getting trade deals, from some of the largest economies in the world.

To get a little more specific, you have the Gulf States. these are countries that have massive capital account surpluses and people are courting their investments. You have, Latin America, which has a lot of the most critical minerals, that are going to be really important in the transition to a low carbon economy.

So, lithium supply is really geographically concentrated. About 98% of it comes from South America, Asia, and Australia.⁵ And the bulk of that, specifically from South America. and then copper. You think about countries like Chile and Peru, they alone account for about 40% of output.⁶ And then beyond this idea of multi-line states beyond this transition, metals, you also have this sort of geopolitical battle in technology where South Korea and Taiwan are great examples of beneficiaries.

So, East Asia, particularly Taiwan, really excels in wafer fabrication and assembly, for semiconductors. Whereas actually the US and Europe and Japan tend to specialize in more of the design of chips. So, you only have a couple of countries that can actually do the fabrication and assembly, they're going to be beneficiaries as the world increasingly fights over things like semiconductors. So, this geopolitical fragmentation idea is going to benefit a range of emerging markets, but also in a range of different ways.

Oscar Pulido: So, you took us on a little bit of a tour around the world in some of your comments and you highlighted the point that these countries are cooperating. They're creating economic blocks. They're increasing their negotiating power and that's making them more powerful players on the economic stage. But we've talked about emerging markets at a high level. Maybe we can zoom in a little bit, you've touched on a few countries, but are there specific ones that in particular you think are poised to outperform?

Jeff Spiegel: If I was going to lean into one country that is potentially most poised to benefit, I would think about this as India, for a variety of reasons. They are beneficiaries of geopolitical fragmentation as well as demographics. And I'll break this down into a couple of areas. The Indian economy is now the world's fifth largest, recently overtaking the United Kingdom.⁷ Again, reinforcing this idea is that emerging markets are not the smaller countries. they're actually some of the largest economies in the world. And by the end of the decade, economists actually think that India will be the world's third largest economy, behind only the US and China.⁸

In fact, the Indian economy grew at a rate of about 7%.⁹ In 2023 and that's expected to remain strong going into 2024. in fact, India's likely over the period to be the fastest growing economy. The G 20 and the upsides are massive going forward, so manufacturing opportunities come to mind. So as supply chains rewire and the world looks to find a gateway to growing South Asian markets, India's really well positioned to benefit.

The Indian government has certainly taken note of this and it's looking to increase attractiveness, as a home for manufacturing. They've introduced production linked incentives. To encourage overseas manufacturers. that initiative alone drew about $6.5 billion in investments during 2022.¹⁰ But India's heft, it's demographic, it's demographics, it's multi aligned status.

all of these things make us think that if there's one sort of standout with maybe the biggest opportunity in emerging markets, it may very well be India.

Oscar Pulido: And it's interesting to hear how they've climbed the ranks in terms of the size of their economy and where you projected that going forward, very much among the leaders in the league table if you were looking at it on a global scale. Jeff, one of the things that, I think back over the last few years, when we think about the pandemic and we think about how the economy was getting rewired, a lot of companies realizing that they were sourcing their supplies from very far away, and we've started to hear this term of nearshoring and companies bringing their supply chains, closer to home. How does that impact. Emerging market economies, is that a positive for the space?

Jeff Spiegel: I think it's a mixed bag for the space. And this is where you have to think about, what are the more specific opportunities in emerging markets and not think about emerging markets as just a single or monolithic cohort.

Trade openness or globalization we often call it has been a one-way escalator ride since the end of World War ii. there were really two forces that drove that. So, the first was the Bretton Woods system after the Second World War championed by the United States. And the second was really around the initial rise of China, its entry into the World Trade Organization, for example, in 2000, but there's a few forces that have changed, a lot of this just in the last few years. And we've actually seen trade openness start to go into reverse for the first time in a long time.

What are those three forces? The first was the Covid19 pandemic, to your point about supply chains, it's not just that they were far away, it's that companies were really prioritizing the lowest cost production of goods. And what they learned is it can't just be about cost. You actually also have to think about resiliency, even if that might make your goods a little bit more expensive. So Covid19 changed this focus away from purely cost towards resiliency. That's the first area, rewiring supply chains. The second is really the war in Ukraine.

And here it was less industrialized goods that were affected, but a lot of commodities, be it energy, be it food, were massively disrupted by this, geopolitical event that's also leading to a rethinking of supply chains. And then lastly, and we've already talked about it a bit, is geopolitics. as geopolitics become more fraught, it means that not just reshoring is important, not even just nearshoring, which you referenced, but also something that we think of as friend shoring. now Mexico I think is actually a really good example to think about what that means.

 So, Mexico is a candidate both for nearshoring and front shoring. Nearshoring is moving production, closer, to the ultimate destination of goods. Friend shoring is moving production towards areas that have really friendly relations between governments, really open trade. So, when you look at Mexico, and you poll executives, of companies around the world and you ask, why is Mexico a potential beneficiary of all this? The answer is threefold.

Qualified labor force, proximity to the US and friendly relations. But Mexico actually isn't the only story in this regard, if you think about a country like Poland in Eastern Europe and its proximity to Western Europe and its friendly relations and its qualified labor force, you actually have a very similar story.

Think about Vietnam, again, skilled labor force, strong government relations with the west, proximity to a lot of markets like India and like Japan. Mexico's not the only part of this story, even though it gets referenced the most, probably because we're sitting here in the US and it's obviously the most directly close by.

But when you start to rattle off the full list of countries who are going to benefit from this rewiring, be they in Southeast Asia, Eastern Europe, Latin America, you actually start to think about most of the actual countries in the emerging market benchmark being huge beneficiaries of these shifts.

Oscar Pulido: Right, so the shift is companies went from just seeking the lowest cost to seeking, you said, resiliency in where they source those supplies and that could be from still a low-cost location, maybe not as low, but also with countries where they have stronger diplomatic relations.

Jeff, you also touched on China. And China constitutes a large proportion of emerging markets.¹¹ China's not only large, but it also has its own opportunities, challenges and nuances. How are investors thinking about China distinctly from other emerging market countries?

Jeff Spiegel: Yeah, so this gets back to this critical point of emerging markets are not a monolith. They have different opportunities associated with them. Now, as far as China's specific role, in emerging markets or in an emerging markets benchmark, the analogy to make here is actually the United States, versus developed markets more broadly. So, people don't tend to invest in developed market equities inclusive of the us.

Instead, they tend to have a dedicated allocation to developed markets, ex-us. Alongside a dedication, a dedicated allocation to US equities. why is that? It's really a size issue. when you put all the developed market countries together, the US makes up such a huge portion that it's just critical to think about it independently.

Otherwise, it's driving your whole developed market allocation. It's a similar situation now with emerging markets in China. So more and more we're seeing investors take a modular approach that actually splits China and these other EM holdings. in fact, ETFs that are tracking, emerging market X China benchmarks might be great tools for investors who are thinking about this opportunity.

this has been a really popular trade. in fact, year to date, we've seen almost $3 billion, flow into such ETFs.¹² Now, what's important to remember is. There's no right or wrong answer, for how to access emerging markets in a portfolio. But we recognize, and we have to recognize that China is a large component of the EM universe, with its own unique characteristics, and it makes more sense today than ever before to have an EM view and a China view that are distinct from each other.

Oscar Pulido: So, Jeff, we've heard from Emily, Fletcher, we've heard from you today on your view on emerging markets and the exciting trends that are driving these countries. So, looking ahead, there's plenty of economic uncertainty and the geopolitical risks, have only escalated more recently. So, what should investors be considering when it comes to emerging markets?

Jeff Spiegel: So, the question is, how do you want to access emerging markets? Do you want to own a broad emerging markets benchmark? The traditional emerging markets benchmark holds about a dozen plus countries, and we continue to see this as the way that most investors seek EM exposure.

Or as we discussed, do you want to think distinctly about emerging markets and China emerging markets? Ex China as an index is actually outperforming that traditional EM benchmark, ¹³ and critically flows into it or growing incredibly rapidly. This is a new phenomenon really just in the last few years, so it's a sea change on the part of investors to do this break.

In the emerging markets benchmark and some are actually getting even more granular still. so India and South Korea have both had tremendous performance this year.¹⁴ They've also had flows into chinaETFs that specifically track those countries.¹⁵ So we're moving from a world in which investors are thinking about emerging markets as a monolith into one where they're either breaking it into two camps or even just targeting to target these individual countries they're getting more deliberate, they're getting more targeted, and that's important because as we discussed, these are some of the most, large and important economies in the world.

So, at the end of the day, emerging markets on the whole are really set to benefit from a lot of these mega forces, demographics and geopolitical changes in particular, but whether in Asia, south America, Eastern Europe, and even within these geographic boundaries, emerging market countries will capitalize on these opportunities differently Some will succeed in policy, others won't. Some will benefit from geographic proximity to the US or Western Europe, others will profit from significant deposits of the metals that are critical to the energy transition. So, the opportunities in emerging markets are many, and they're exciting, but investors need to be deliberate in how and literally where they want to capitalize.

Oscar Pulido: It sounds like a space that is evolving a lot and the way in which investors are approaching emerging markets is also evolving, is what you're saying. So, we'll hope to have you back and hear more about how emerging markets are evolving and how this story is playing out. But Jeff, once again, thank you so much for joining us on the Bid.

Jeff Spiegel: My pleasure. Great to be back with you.

Oscar Pulido: Thank you for listening to this episode of The Bid. If you enjoyed this episode, check out the episode titled A Stock Pickers Guide to Emerging Markets with Emily Fletcher. Subscribe to The Bid wherever you get your podcasts.

<<THEME MUSIC>>

<<SPOKEN DISCLOSURES>>

This content is for informational purposes only and is not an offer or a solicitation. Reliance upon information in this material is at the sole discretion of the listener.

For full disclosures go to Blackrock.com/corporate/compliance/bid-disclosures

1 BlackRock Investment Institute, “Capital Market Assumptions,” 08/2023. Data as of 06/30/2023.

2 The Economist, “Global firms are eyeing Asian alternatives to Chinese manufacturing,” 02/20/2023.

3 Ibid

4 Ibid

5 McKinsey & Company. Lithium Mining: How New Production Technologies Could Fuel the Global EV Revolution, 4/12/22.

6 International Energy Agency. “The role of critical minerals in clean energy transitions”, May 2021.

7 World Economic Forum, “This chart shows the growth of India's economy,” 09/26/2022.

8 The Economist, “India likely to become third biggest economy behind US and China by FY28,” 10/16/2022.

9 The Economist, “India's economy likely to grow 7% in FY23: First advance estimates,” 01/07/2023.

10 Reuters, “India to review production incentive scheme this month-end,” 06/13/2023.

11 Morningstar, MSCI. China constitutes 30% of the MSCI Emerging Markets Index as of 9/30/2023.

12 BlackRock, as of 9/30/2023.

13 Morningstar. The iShares MSCI Emerging Markets ex-China ETF has a YTD total return of 6% as of 09/30/2023. The iShares Core MSCI Emerging Markets ETF has a YTD total return of 3% as of 09/30/2023.

14 Morningstar. The iShares MSCI India ETF has a YTD total return of 7% as of 09/30/2023. The iShares MSCI South Korea ETF has a YTD total return of 4% as of 09/30/2023.

15 BlackRock, as of 9/30/2023.

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