Gone on vacation recently? Last year, Canadians took 34 million trips abroad. Among those trending destinations, certain countries, including Taiwan and Mexico, are considered in financial parlance as emerging market economies.
Emerging markets are nations that are evolving from lower-income economies towards modern, industrial economies. Notable emerging market nations include Brazil, China, India and Taiwan.
Home to much of the world’s population, emerging markets have undergone a significant transformation in recent years to emerge as hubs of entrepreneurship and growth.
On a daily basis, many people in developed markets consume products and services made in emerging market countries, such as smartphones and clothing. As you can see below, the economic prospects for emerging markets and developing nations appear favourable:
S&P Global has commented that recent forward-looking indicators in the region hint at sustained growth. You can also see in the following chart how emerging market nations are ahead in terms of manufacturing and services economic output:
WHY EMERGING MARKETS?
Overall, emerging markets represent roughly 85% of the world’s population, around 42% of global Gross Domestic Product (GDP) and about 80% of GDP growth, but only 11% of global market capitalization.1
“Canadians seem to have a home bias and a keen interest in income when it comes to their investments,” says Alexander Smahtin, Senior Analyst, Investment Management at Global X.
“For true global diversification, you need emerging markets exposure.”
Although over the recent decade, the performance of emerging markets has been overshadowed by the dominance of U.S. markets, with a 7% total return2 from 2011 to 2021, could now be the time for an emerging markets resurgence?
During the last emerging markets cyclical upswing – which took place between 2001 and 2010 – the MSCI Emerging Markets Index delivered a cumulative return of 344.40% versus 15.07% for the S&P 500 Index.
For many investors, emerging market exposure can provide portfolio diversification and improve risk-adjusted returns. In May 20243, investors poured just under US$1 billion into a single U.S.-based Emerging Markets exchange traded fund (ETF(s)). And just last year, inflows into U.S.-listed Emerging Market ETFs exceeded US$10 billion.
John Kolovos, Chief Technical Strategist at Macro Risk Advisors recently told Barron’s that if the earnings growth of emerging markets companies rises as expected – and confidence in the global economy holds – emerging market stocks could potentially outperform indices such as the S&P 500.
Another catalyst is a demographic phenomenon. The post-World War II baby boom in North America led to a significant expansion of middle-class consumers in the following decades. Similar economic patterns seem to be emerging across emerging markets, with 91 million people will be joining the world’s consumer class in 2024, growing to roughly five billion people by 2031.
Source: World Data Lab
Looking even further ahead, according to the United Nations, the world’s population is expected to reach 9.7 billion by 2050 with most of this growth expected in emerging market economies and precursor developing economies.
Developed countries will see a decrease in their working-age population, while most developing regions will remain stable, and some will even see this demographic grow. This phenomenon is what MSCI4 calls a “demographic dividend”. This may provide an opportunity for accelerated economic growth and social development since emerging markets nations have, on average, a younger workforce with growing purchasing power.
Also, the world’s increased demand for certain commodities – which we have provided in an article here – may translate into higher prices, especially for commodities such as copper, which is mainly produced by emerging market nations, including Chile, Peru and China. These higher commodity prices could translate into higher levels of consumption within emerging markets.
EMERGING MARKETS AS AN ASSET CLASS
MSCI has been a leader in emerging markets data and insights since the late 1980s. As a provider of critical decision support tools and services for the global investment community, more than $1.3 trillion in assets under management are benchmarked to its emerging markets indices.
You can see how countries have been added and removed from MSCI’s Emerging Markets classification here:
MSCI launched the MSCI Emerging Markets Index in 1988 with 10 countries comprising less than 1% of the global equity universe at that time. Today, the index encompasses 24 markets and accounts for nearly 11% of the global equity opportunity set.
India
- Currently the world’s fifth-largest economy and most populous nation with 1.4 billion people since April 2023.
- Home to 10 of the fastest-growing cities in the world.
- Over 7,200 companies are listed on the country’s two stock exchanges, with the Bombay Stock Exchange being the oldest in Asia.
Poland
- Tenth-largest economy in the European Union.
- From 2004 to 2022, Poland’s real GDP doubled, which was more than any other Central and Eastern European country that joined the European Union.
- GDP growth is seen to reach 2.3% in 2024.
You can see a breakdown of MSCI’s Emerging Markets benchmark index here:
HOW TO INVEST
Global X has partnered with MSCI to offer four direct ways to invest in emerging markets, based on an investor’s risk exposure and performance potential:
| ETF | Investment Objective | Management Fee* |
|---|---|---|
| Global X MSCI Emerging Markets Index ETF (EMMX.U**/EMMX) | EMMX seeks to replicate, to the extent reasonably possible and net of expenses, the performance of an index that is designed to measure the performance of the large and mid-cap securities across emerging markets countries (currently, the MSCI Emerging Markets Index). | 0.25% |
| Global X MSCI Emerging Markets Covered Call ETF (EMCC) | EMCC seeks to provide, to the extent possible and net of expenses: (a) exposure to the performance of an index of large and mid-cap securities across emerging markets (currently, the MSCI Emerging Markets Index); and (b) monthly distributions of dividend and call option income. To mitigate downside risk and generate income, EMCC will employ a dynamic covered call option writing program. | 0.65% |
| Global X Enhanced MSCI Emerging Markets Index ETF (EMML) | EMML seeks to replicate, to the extent reasonably possible and net of expenses, 1.25 times (125%) the performance of an index of large and mid-cap securities across emerging markets (currently, the MSCI Emerging Markets Index). EMML will use leverage in order to seek to achieve its investment objective. Leverage will be created through the use of cash borrowings or as otherwise permitted under applicable securities legislation. | 0.49% |
| Global X Enhanced MSCI Emerging Markets Covered Call ETF (EMCL) | EMCL seeks to provide, to the extent reasonably possible and net of expenses: (a) exposure to the performance of an index of large and mid-cap securities across emerging markets (currently, the MSCI Emerging Markets Index); and (b) high monthly distributions of dividend income and call option premiums. To generate premiums, EMCL will be exposed to a dynamic covered call option writing program. | 0.85% |
*Plus applicable sales tax
**Trades in U.S. dollars
For traditional emerging markets exposure, investors could consider EMMX, which tracks the MSCI Emerging Markets Index and provides physical replication and exposure.
EMCC employs an options-writing program as part of its active management strategy, specifically covered call overlays. This is an investment strategy designed to generate the potential for additional income over and above the income from its underlying index exposure. As an options-based ETF, EMCC seeks to generate higher yields relative to its underlying index and may result in higher levels of monthly income for investors. EMML uses leverage, a strategy that can potentially magnify both gains and losses and the fund aims to generate approximately 1.25x the return of its underlying index.
With EMCL, Canadian investors have access to emerging markets with light leverage and a covered call overlay. This can potentially enhance growth and income potential while still providing underlying MSCI Emerging Markets Index exposure.
Global X offers a world of opportunity with global possibilities. For more information on our extensive suite of ETFs, visit www.GlobalX.ca
Sources
1 Global X US based on World Bank and International Monetary Fund data accessed on April 1, 2024.
2 Global X based on MSCI Emerging Markets data accessed on May 30, 2024.
3 Bloomberg News, “Once-Unloved Emerging-Market ETF Gets Best Inflow in Two Years”, May 22, 2024.
4 MSCI, “Sizing Up Opportunity in Emerging Capital Markets”, 2023
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Published June 19, 2024
Categories: Articles, Insights
Topics: International