What investors should know about emerging markets in 2023 and beyond

Cape Town - "Emerging markets offer the potential for higher growth than developed ones, especially as increasing portions of their populations move into the formal economy and consume a wider variety of goods and services," said Kingsley Williams, Chief Investment Officer at Satrix at an Emerging Markets IndexMore webinar. 

Satrix, South Africa's leader in index investing, regularly convenes local and international experts to provide insights to South African investors to help them make informed investment decisions. 

Natasha Sarkaria, Investment Strategist in the iShares EMEA Investment Strategy Team at BlackRock, said that emerging market (EM) equities are favoured over developed market (DM) equities on a short-term, tactical basis, with EMs likely facing macroeconomic tailwinds. "These include the potential for a weaker US dollar, the end of EMs' interest rate hiking cycles, and China's economic 'restart'."

Global investors have taken notice of this, with $12.2 billion flowing into EM-focused equity UCITS exchange traded products (ETPs) in the first quarter of 2023, outpacing flows into developed markets ETPs. While the majority of investments were previously in broad emerging markets, investors are now favouring single country allocations following China's reopening and the demand for greater selectivity.

According to Tom Husmann, Equity and Commodity Product Specialist at BlackRock, country selection can contribute up to 40% of the performance generated from EM equity exposure. Therefore, investors should focus on countries that can consistently deliver higher growth.

India overtook China as the world's most populous country in 2023, with a population of more than 1.425 billion people. With 600 million people expected to relocate to cities by 2031, driving a range of infrastructure investments, India is well-positioned to take the baton from China as the emerging markets superpower.

Arthur Kamp, Chief Economist at Sanlam Investments said India will be a major theme in emerging markets this year, "Elsewhere, China is becoming a relatively more labour-expensive environment to do business in as it moves up the value chain, so manufacturing is starting to shift elsewhere. Generally, investors want high growth, low inflation, high productivity environments." 

He continued that the demographics in developed markets count against them and a number of countries in other regions, like Latin America, have fallen into middle income traps - this means the long-term prospects for these markets are tarnished by relatively softer growth prospects. So, there are bumps and bruises in all regions and geographical risk is elevated. The bottom line is to look for the markets that are going to consistently deliver higher growth as a key differentiating factor."

Investors can achieve cost-effective exposures to emerging markets with a wide range of Satrix ETFs, including country-specific exposure to China or India. As investors seek long-term growth prospects, emerging markets present high-growth investment opportunities in 2023 and beyond.