Finance

More people, more money

Why developing countries are driving in the fast lane

After recent emerging market drawdowns, do investments in developing countries still pay off? Yes, says Markus Beeler, Head Product Management at responsAbility. And in 30 years, they’ll dominate global investment allocations.

New Markets

Emerging and frontier markets will dominate global investment allocations in 30-40 years’ time for two main reasons – population growth and rising incomes.

Population growth

The United Nations estimates that only two countries which currently classify as ‘developed countries’ will feature among the world’s 22 most populous countries by 2050.

Compare this to the 11 countries that today classify as ‘emerging’ and ‘frontier’ markets.

New Markets Graphic 01

Country groups’ GDP as a share of the global total (in %)

Source
Worldbank

Rising incomes

PricewaterhouseCoopers states that per capita incomes in less developed countries will grow by about 3% a year between now and 2050.

In comparison, per capita income in the US will only increase by 1.8% during the same period.

 

“By 2050, many developing countries will have overtaken the industrial nations and will subsequently extend their lead.”

 

This will have an impact on purchasing power. By 2050, many developing countries will have overtaken the industrial nations and will subsequently extend their lead.

Emerging markets: returns at high risk tolerance

Developing countries offer a wealth of investment opportunities. Their selection depends on investors’ risk tolerance and investment horizon.

Over long periods of time, equity investments in developing countries have substantially outperformed the global equity market index.

In return, however, investors have had to accept substantially higher volatility.

New markets Graphic 02
Source
Bloomberg, December 2015

Development investments ahead of equities and bonds

Many of today’s ‘frontier markets’ do not have an investible stock or bond market.

An alternative investment approach is private debt and private equity investments in various sectors with a development impact: development investments.

These niche investments can serve as a sustainable complement to emerging market investments via equity and bond markets.

Looking to invest in the financial sector?

Microfinance in comparison: stable long-term returns

New markets Graphic 03
Source
Symbiotics, Bloomberg, December 2015 Microfinance: SYM50, developing market bonds: CMDCOM, global bonds: LEGATRUH, global equities: MSCI World

Microfinance investments

 

“Development investments, such as microfinance investments, can demonstrate long-standing positive returns, which even withstood the global financial crisis.”

 

Niche investments are attracting increasing attention from institutional investors such as pension funds and insurance companies – not least because development investments, such as microfinance investments, can demonstrate long-standing positive returns, which even withstood the global financial crisis.

Sources: United Nations, PricewaterhouseCoopers