3 Themes for Growth in Emerging Markets

Looking for drivers of returns in emerging markets? Aviva's Will Ballard picks three themes he considers will lead to investment growth across the sector

Emma Wall 11 August, 2016 | 8:00AM
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Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and I'm joined today by Will Ballard, Head of Emerging Market & Asia Pacific Equities for Aviva Investors, to give his three themes for growth.

Hi, Will.

Will Ballard: Hi.

Wall: So, what's the first theme you'd like to highlight today?

Ballard: Well, the first thing I'd like to point out is, when you look at emerging markets, the historical drivers for emerging markets have changed. They used to be very intrinsically linked to the commodities super cycle. Now, there's one thing we can agree on and that is coming to an end. What has changed now though is that actually the domestic economies within emerging markets are continuing to grow and there are certain areas where they are underserved.

So, let me give you the first example. That's the healthcare sector. When you look at developed markets, there's already a well-established healthcare service, good hospitals, access to drugs, et cetera. In emerging markets that simply does not exist. Or if it does, the quality of that service is incredibly poor. As people get wealthier, their life expectancies increase, their incomes increase, their desire for decent healthcare, decent provision of healthcare increases almost exponentially in our view.

Wall: And does that then met by big global developed market players who are entering into those markets or are we seeing domestic equities really thrive within that healthcare space?

Ballard: It's a very good question because what you've seen is you've seen a mixture of the two, but not the big global players you would expect from developed markets. You've actually seen emerging market players expand from areas like South Africa, for example, into Indonesia or into Thailand.

At the same time, you've seen domestic players grow very rapidly, simply because they know about the domestic demands, the domestic regulation, things like that. So, it's a balance. But the interesting thing is, the developed market players simply aren't there because the demands for emerging markets are very different.

Wall: What's the second theme today?

Ballard: So, the second theme is similar in a way in that it's very linked to the growing demands from the consumer as wealth increases. And what it is for us is, it's education. Now, similar to healthcare, where you have a good provision of a service in developed markets, there's that absence in emerging markets, not just in healthcare but also in education. So, people go down to the private sector to try and fill in that gap. You can see it develop very successfully in South Africa, in India, even in China as well.

Wall: And is it then in the further education space are we talking or is it throughout the sort of education process?

Ballard: This is all the way from kindergarten all the way through to university. Simply where the service that's provided by the state is not good enough, you can find private entrepreneurs who are looking to try and enter that market and generate good returns.

Wall: And what's the third theme for growth?

Ballard: So, the third theme we're looking for is an age-old theme for emerging markets and that's literally the growth in consumption. That's very widely spread. You can tell from our three themes we're very focused on domestic factors within emerging markets. We're not looking for large global trends. We're looking for the drivers at the individual country level. And what we find is that as people's wealth increases, their desire for fashionable shoes, for handbags, whatever it might be, increases. But what we think even more interesting is you've had this initial drive which was for the very high-end products…

Wall: The luxury stocks.

Ballard: The luxury products. The area we think is very interesting now is actually the lower or middle end where you get lower-income people whose income has increased over the past 5 to 10 years to the level where they can now enjoy what they perceive to be luxury, entry-level luxury as such.

Wall: Will, thank you very much.

Ballard: Thank you.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

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Emma Wall  is former Senior International Editor for Morningstar