Emerging markets are hot. The most widely-traded dollar ETF in the category, ticker EEM, is up nearly 85% from the darkest days last March. The S&P 500, standard measure of U.S. stocks, has gained a mere 57%.
But emerging markets are, I think, misunderstood. How many non-specialists know that Taiwan and South Korea, hardly Third World nations, are the No. 2 and 3 emerging markets, as determined by the index lords at MSCI? Many large developing economies —Vietnam, Pakistan, Egypt, Nigeria— are meanwhile excluded as “frontier” markets. There are good reasons for this, which we can get into another time.
Emerging market companies may not be what you think either. Long gone are the days when oil companies and state banks dominated the sector. Today’s Big Four stocks are Taiwan Semiconductor, Chinese social media empire Tencent, Alibaba, and Samsung. Together they account for nearly a quarter of the index. Three other Chinese internet stars are in the top 10 — JD.com, Meituan, Pinduoduo— as is electric vehicle sensation Nio.
And emerging markets tech is just getting started. China, Korea and Taiwan have seized the high ground in next-generation industries like solar and EV components while Western companies dithered, or were underpriced by Chinese subsidies. Seven of the top 10 magnates on Bloomberg’s latest Green Billionaires list are Chinese, owners of companies most people have never heard of, yet: CATL, Longi, BYD. “Laggard” markets like India and Brazil create opportunity in their own way, with huge populations that are barely penetrated by online services. Firms like Mercado Libre in Latin America and Jio Platforms in India (so far a division of conglomerate Reliance Industries) are taking advantage for eye-popping growth.
Knowledge is power in emerging markets. China and India alone offer 10,000-some listed stocks, with IPOs adding hundreds more each year. This universe is thinly researched. Stock pickers and active managers, an endangered species in developed markets, still thrive. Mutual funds from T. Rowe Price, Templeton, Invesco, and others have outperformed the index by 20-40 percentage points over five years. As a humble journalist, I don’t intend to outsmart the investment professionals. But like a busy intellectual bee, I can spread some nectar of cumulative wisdom.
Emerging markets are fascinating and fun. The rise and fall of stocks and bonds may be the foreground of my inquiries. The background is nothing less than the future of humankind, as China rises and butts up against the United States, 1.4 billion Indians see their lives transformed by the reach of the internet, Vietnam, Mexico and Bangladesh vie for their slice of shifting global supply chains. The rogue’s gallery of leaders astride this process has seldom been more vivid: Xi, Modi, Putin, Bolsonaro, Erdogan, Lopez Obrador. The emerging markets investor/analyst is compelled to play amateur psychologist to these outsized personalities — which adds plenty of zest to the conversation.
I have been privileged to report on this pageant for 30 years now, the last three as emerging markets columnist for Barron’s. It’s a gig I’m honored to retain. But I find much more fascinating news and insight than I can possibly fit into 550 words a week. So I am widening the pipeline. I hope you all will help me along the journey.