Investing

3 Global Trends Creating Value in International Investing

On the face of it, emerging international markets hardly offer a ready refuge, either, having realized little more than half the gains of the S&P 500 in 2016.

The supposed Trump rally continues in U.S. markets, but many analysts also agree that valuations among U.S. equities are high. Meanwhile, developed international markets have been losing ground: The Brexit referendum vote sent the FTSE 250 into decline and new fears of France separating from the EU has cast more doubt on international equities.

On the face of it, emerging international markets hardly offer a ready refuge, either, having realized little more than half the gains of the S&P 500 in 2016. However, here are three reasons to look more closely at up-and-coming financial centers in 2017.

Robust Growth Is Predicted

Bullish predictions for the emerging world’s markets are rampant. Price Waterhouse Coopers projects that China and India will rank as the number one and two GDP world economies respectively by 2050, with Vietnam, the Philippines, and Nigeria also poised for the greatest ascent, the company says. Furthermore, the study remarks that “The US and Europe will steadily lose ground to China and India.”

Recently, Arif Naqvi, CEO and founder of the private equity firm The Abraaj Group based in Dubai predicted that "Two-thirds of the world's GDP growth is going to come from these markets in the course of the next 10 [to] 12 years.” Further, a recent IMF report cited the robust manufacturing activity and improved commodity prices of the developed world in recent years, and noted that “emerging and developing economies are forecast to grow by 4.5% in 2017 and 4.8% in 2018, up from 4.1% in 2016.”

They’re Leaders In Sustainable Energy

The International Energy Agency projects that “renewable electricity...will account for almost two-thirds of net additions to global power capacity” between now and 2020, and predictions are equally bullish for hydro, solar and wind power. Emerging markets are well-suited to develop these new technologies, having less infrastructure in place that will require costly retrofitting. Plants built from scratch around renewable technology are better able to capitalize on the latest innovations than fading fossil-fuel relics.

Labor Forces Are Young And Tech-Savvy

Technology firms lead the list of largest companies by market capitalization in the MSCI Emerging Markets Index. These companies haven risen to the top because “growing populations are already shaping consumption habits. Most of the world’s two billion millennials (those born between 1980 and 2000) live in developing market economies,” according to American Funds. Growing wealth in these countries, and among this demographic wave in the developing world, has invigorated the appetite for technology services, cell phones, and other goods. Accordingly, the accessibility of the internet in areas that previously went without is allowing exponential growth of commerce. More people in emerging economies will have access to the online workforce enabling them to engage in a digital economy from anywhere.

Investors can capitalize on these long-term trends by getting into international equities on the ground floor. Choose either a broad international equity index fund with a low expense ratio or a country-specific fund.

You should, however, very much take the long view of these emerging investments since, as Price Waterhouse Coopers warns, bumps in the road are inevitable. “To realise this growth potential, emerging market governments need to implement structural reforms to improve macroeconomic stability, diversify their economies away from undue reliance on natural resources(where this is currently the case), and develop more effective political and legal institutions.”

Bottom line: The emerging world, and its markets, are young and growing, and will undoubtedly encounter some turbulence as they move into adolescence. But the rewards of staying with them as they mature could be considerable.

Justin Song

Justin is a Sr. Research Analyst at ValuePenguin, focusing on small business lending. He was a corporate strategy associate at IBM.

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