Seven key themes in emerging markets

James Johnstone, co-head of emerging & frontier markets at RWC Partners, looks at the most significant emerging market themes for investors.

Infrastructure

Despite significant progress made in infrastructure over the past 25 years, access to even basic infrastructure in many emerging markets remains limited. For example, 1.3 billion people still have no access to electricity. Some 660 million people still live without safe drinking water and 2.4 billion people are without basic sanitation. 

There is a strong push-pull relationship between infrastructure and GDP growth. As GDP per capita increases, more infrastructure is required and as infrastructure improves, GDP growth should rise, all else being equal.

Technology disruption

Technology is in a constant state of flux with more efficient versions replacing incumbent processes. We are looking for technology companies that disrupt traditional industries, create entirely new business models or where the pace of technology change reduces the competitors to an effective oligopoly. 

Artificial Intelligence

Artificial Intelligence (AI) is driven by the large increase in available computing power. This makes it possible for computers and machines to perform tasks that have traditionally required human intelligence. Examples include visual perception, speech recognition, language translation and decision making. 

Current AI is only designed for specific tasks but future levels will incorporate deep learning capabilities and eventually independent programme generation, which will be able to accomplish more complex tasks.

5G

Mobile data consumption is doubling roughly every 18 months. The emergence of 5G should accelerate our consumption and open the scope for more real-time and seamless interconnectivity with data centres and the cloud. 

There will be many beneficiaries of 5G adoption, but hardware will likely be the first. With higher frequencies for 5G, it will require more base stations. Chip-makers will also profit as the internet of things phenomenon will lead to more devices requiring chips for connectivity and existing devices requiring more components.

Emerging markets travel

The growth of tourism and travel over the last century is astonishing. 

The UN World Tourism isation estimated that in 1950, there were just 25 million tourist arrivals internationally. Today, destinations worldwide welcomed 1.3 billion international tourist arrivals. Tourism is 10% of global GDP and is forecast to rise to 12% by 2028. Chinese outbound tourism is at nascent stages, with only 10% of Chinese nationals possessing a passport, but this number is increasing rapidly.

Copper

Copper has been a key metal since the industrial revolution largely due to its use for the transmission of electricity. It took copper mining over 120 years to build up the current annual production of 20 million tonnes. While there are several growth sectors for copper consumption, transportation is the most promising. Electric vehicles use up to seven times more copper per car and a wholesale switch from internal combustion engine to electric vehicles would require the copper supply to almost double.

Financial inclusion 

Over 1.7 billion adults in emerging and frontier markets do not possess a bank account. Even if they have an account, most will have little more than a transactional deposit account. Today, a digital revolution is underway in the financial services industry and companies are adapting their products to the needs of a broader target audience. This move will allow financial institutions in emerging markets to increase their revenue streams. 

While spending, saving and payment trends vary considerably from country to country, emerging markets are particularly attractive for fintech investments as they offer new alternatives to traditional banking systems. 

Mobile money has emerged in various countries such as China, India, Kenya and Bangladesh, which has helped reduce logistical challenges and informal economic activity.