The Future of Emerging Markets

Courtesy of Financial Times

By Natnaree Jiruppabha  

The rollout of Covid-19 vaccinations and strong governance on part of the local authorities enabled faster  recoveries in China and other parts of Asia as compared to the West. Although the momentum of the recovery  might decline this year, governments throughout Asia will be providing fiscal support, which will likely  increase private consumption. Furthermore, a weaker dollar makes equities and currencies in Asia more  attractive. A rise in technological innovation, along with the factors mentioned above, have made many  emerging market countries ripe for large domestic and foreign investments.  

Rise in Innovation Leads to New Opportunities of Investment 

During the pandemic, Asia led innovation in digital payments infrastructure, which was incentivized by the  sudden growth in demand for tech products. This contributed to a substantial rebound in manufacturing and  trade in emerging markets: technology accounts for 20% of the MSCI Emerging Markets Index. China, Taiwan,  and Korea make up approximately two-thirds of the EM Index. In China, the dominant mobile payment  platforms include Alipay by Ant Financial and Tenpay by Tencent and Yeahka. The increase in early stage  financing has contributed to this rise in innovation, exemplified by the rise in the rate of venture capital funding outside the US. Investors are finding new opportunities with cheaper valuations; one such opportunity is the growing biopharmaceutical sector in China.  

Growing Investment Opportunities in Fintech  

Another investment opportunity lies in the increasingly prominent role of fintech. As industries like brick and  mortar retail, grocery, and real estate are being shifted online at a global scale, new investment opportunities –  companies that can help with this transition – have emerged. Nearly $2 trillion across various industries in the  US is transferred from offline to online, highlighting the growing importance of fintech. We will likely see the  same trend repeated in emerging markets in the future.  

A Weaker Dollar  

Going forward, experts predict that the dollar will likely remain weak against other currencies in 2021, which  would benefit emerging markets equities and debts. A weaker dollar combined with a near-zero interest rate can help countries like the Philippines and other Southeast Asian countries as it leads to improved financial  conditions for companies with debt in dollars and revenue in local currency. This contributes to a brighter  picture for equities in emerging markets.  

Experts see the potential of investing in emerging markets and in China because of the economic recovery this year, combined with the expected decline in the dollar and increase in innovations in Asia. However, the growth  in these markets depend on the trajectory of the virus and the continued administration of vaccines. Thus, while investing in emerging markets seems promising, one should keep in mind their desired risk profile as the region  can still be victim to a second wave.

These are the writer’s personal opinions and that readers should make their own informed decisions. – A note from the Dean’s Office.

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