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Gustavo Sung

Chief economist, Suno Research, Brazil


 


Why Invest in Emerging Markets?


Over the past two decades, emerging markets (EM) have undergone significant transformations, driving global economic growth. Investors worldwide have increasingly focused on these countries, which include, Brazil, China, India, Russia, South Africa, Mexico, and Argentina, due to their high growth potential and developmental prospects.


These nations have contributed to nearly two-thirds of global GDP growth in the past decade. Recent data shows that they represent approximately 85% of the world's population and contribute 50% to global GDP.


Emerging markets have achieved high growth rates due to factors such as their relatively low initial economic base, productivity enhancements, and substantial inflows of international investments. As a result, they have consistently outpaced advanced economies in growth rates, solidifying their significance in the global economic landscape.

Morgan Stanley Capital International (MSCI) has developed a dedicated index for this group of countries, known as the MSCI EM, which serves as a benchmark used by global investors to monitor their performance. Notably, the index includes countries such as China (24,9%), India (18,0%), Taiwan (16,6%), South Korea (12,2%), and Brazil (5,7%), which are among the world's top 20 economies and host a diverse array of companies across pivotal sectors such as energy, finance, technology, e-commerce, and commodities.


For instance, China has attracted global attention as one of the main economic powers. However, the Chinese economy has undergone significant shifts that could alter its development trajectory. Projections suggest a growth rate of approximately 4% to 5% in the coming years, marking a cooling from previous years.


China traditionally relied on exports, infrastructure investment, and heavy industries to growth, facing challenges such as sectoral oversupply and heavy dependence on external markets. In response, the government is reassessing its economic model, emphasizing the stimulation of household spending and domestic market expansion through measures like wage hikes, credit expansion, and social programs aimed at enhancing purchasing power. Additionally, efforts are directed toward bolstering sectors like retail, tourism, healthcare, and technology.


A primary objective of the Chinese government is to nurture a burgeoning middle class, laying the groundwork for sustainable economic growth and fostering a conducive environment for domestic investment. Furthermore, China has adopted an outward investment strategy in recent years, with investments spanning across continents, totaling approximately $1.9 trillion between 2005 and 2018. The Belt and Road Initiative, a flagship project aimed at enhancing regional-global infrastructure and expanding influence, exemplifies this strategy.


India, another rapidly expanding economy, has emerged as a promising and dynamic market. With a population exceeding 1.4 billion and significant growth potential, India is poised to become the world's third-largest economy. Surpassing many emerging markets, including China, India has sustained an average annual growth rate of 6% to 7%, propelled by factors like foreign investments, a burgeoning workforce, and robust domestic demand.

The proliferation of India's middle class has been a key driver of growth, fueling domestic market expansion through urbanization, income growth, and improved access to education. With a youthful and expanding population, India boasts a considerable demographic dividend, capable of enhancing productivity and attracting global investments.


Moreover, India has made strides in various sectors, particularly technology, with Indian firms leading software and IT services on a global scale. Notably, Bangalore has earned the moniker of India's "Silicon Valley."


Finally, Brazil, possessing one of the largest emerging economies globally, boasts a vast and diverse domestic market. Endowed with abundant natural resources, a robust agricultural sector, and burgeoning industries like renewable energy, Brazil demonstrates substantial economic potential, especially amidst growing environmental concerns and the transition towards sustainability.


Additionally, Brazil ranks among the foremost exporters of commodities globally, capitalizing on rising demand for food and energy inputs such as oil and iron ore. Recent significant economic reforms, including pension reform, tax reform, and Central Bank autonomy, have bolstered Brazil's image, improved the business environment, and reduced uncertainties.


However, it's imperative to recognize that emerging markets tend to exhibit higher volatility compared to developed nations, attributable to factors such as political instability, fiscal risks, legal uncertainties, and geopolitical tensions. 


Despite these challenges, emerging markets remain attractive to long-term investors due to their leading role in global economic growth, which is poised to further develop their markets and enterprises in the years ahead.





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