5 minEmerging countries’ companies: catalysts for global economic growth
Jean Albert Carnevali As highlighted in our previous article, "Are emerging countries the new developed markets?” emerging economies, once seen as secondary players, are now at the heart of global economic growth. Against this backdrop, companies in emerging countries are poised to assume an increasingly prominent role in the global economic landscape. Moreover, emerging countries and their companies are becoming essential players in a world grappling with the challenges of climate change and social inequality.
In this article, we will shed light on the place that these companies occupy in today's globalised economy, as well as the development opportunities that they offer to companies from advanced countries. We will also explore the prospects for fixed income investment arising from this dynamic.
Position of emerging country companies in the world
The spectacular growth of the emerging countries' companies over the last few decades can be explained by a combination of several favourable factors, the two main ones being: the access to highly demanded natural resources amid a major energy transition, and the emergence of the middle class in these countries.
Indeed, developing countries possess resources that are essential to the functioning and development of today's world. The distribution of these crucial resources for applications linked to the energy transition gives emerging countries and their companies a central role in the journey towards a more sustainable world.
With European investments in mining and energy projects slowing, China in particular has invested massively, making itself a key player. Rare earths, which are mainly present in emerging countries, are an emblematic example, with China holding the majority of reserves at 44 million tonnes. By way of illustration, the leading developed country in this ranking, Australia, is only in 6th place with 4.2 million tonnes [1].
Another instance involving China: in 2021, the Middle Kingdom will account for nearly 80% of the world's production of photovoltaic modules [2] and batteries for electric vehicles [3]. Nowadays, China is seen not just as "the world's factory", but as a key player in the end-customer value chain.
It is not the only emerging country benefiting from this trend. For example, lithium, an essential material for batteries, has a strong presence in Latin America. Another region, another advantage: Eastern Europe has the industrial know-how to enable German car brands to produce their components.
The second supporting factor is the sociological evolution in emerging countries. The strong economic development of recent years has given rise to a middle class whose purchasing power is stimulating the local economy, encouraging the growth of companies active in other sectors besides raw materials.
Sectors such as technology, communications, financial services and manufacturing have seen the emergence of national champions that now compete with the giants of the developed economies. Chinese companies such as Huawei, Alibaba and Tencent, as well as Indian firms such as Tata Consultancy Services (TCS) and Infosys, have gained global recognition.
Opportunities for developed countries' companies
The development of emerging countries is also having an impact on companies in developed countries, which no longer see them as mere suppliers of raw materials but as attractive target markets.
Companies such as LVMH and Volkswagen have made them their flagship markets. For many companies in the developed world, extending their activities to emerging countries is now their primary growth driver. Unilever is a perfect example: over the last 20 years, the proportion of its operating profit generated in emerging countries has risen from 27% to over 50% [4]. The situation is similar for other major multinationals from the developed world.
Furthermore, for companies from developed countries, emerging nations offer a pool of talented, young human capital that can provide real added value in the search for new solutions. Universities and centres of expertise in emerging countries are increasingly gaining international recognition, attracting companies looking for young talent. India is a perfect example, with cities like Bangalore boasting a high concentration of information-related professions.
Prospects for bond investors
As companies from emerging countries open up to the world, their financing needs are constantly increasing. Given the international nature of this expansion, these companies are increasingly relying on financing in hard currencies such as the euro or the dollar. By way of illustration, the dollar-denominated corporate debt market in emerging countries has grown from a nominal USD 280 billion at the end of 2014 to more than USD 550 billion today (November 2023) . This increase is explained not only by a rise in corporate debt issuance, but also by the broadening of the market with more players within the economy. For developed countries' investors, this represents an opportunity to participate in the development of these companies while avoiding currency risk, which is sometimes difficult to hedge.
In terms of yield offered, companies from emerging countries often pay an additional risk premium, which is more often linked to country risk than to the company's financial risk. Over the long term, the extra yield on corporate debt in emerging countries has produced a superior performance (+0.77% over 5 years [6] and 4.71% over 10 years [7]).
It is therefore indisputable that emerging markets are a vector for long-term growth, and that the companies they harbour and their development prospects enable investors from developed countries to broaden the spectrum of their investments in a diversified portfolio.
_________________
[1] Source: https://www.vinachem.com.vn/content/market-and-product-vnc/rare-earths-reserves-top-8-countries.html
[4] Source: Bloomberg
[5] Source: JP Morgan CEMBI Index
[6] Period ranging from 31/10/2018 to 31/10/2023
[7] Period ranging from 31/10/2013 to 31/10/2023
Legal information
BLI - Banque de Luxembourg Investments ("BLI") has prepared this document with the greatest care and attention. The views and opinions expressed in this publication are those of the authors and in no way bind BLI. The economic and financial information included in this publication is provided for information purposes only on the basis of information known at the time of publishing. This information neither constitutes investment advice nor a recommendation or inducement to invest, nor should it be construed as legal or fiscal advice. Any information should be used with the utmost care. BLI makes no warranty as to the accuracy, fiability, recency or completeness of this information. BLI shall not be liable for the provision of such information or as a result of any decision made by any person, whether a BLI client or not, based on such information, such person remaining solely responsible for his or her own decisions. Persons intending to invest should ensure that they understand the risks involved in their investment decisions and should refrain from investing until they have carefully assessed, in consultation with their own professional advisers, the suitability of their investments to their specific financial situation, in particular with regard to legal, fiscal and accounting aspects. It is also reminded that the past performance of a financial product does not prejudge future performance.
