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EM equities: adding alpha through active management and a consumer sector focus
- Growth in emerging market economies and equity markets continues to be driven by rising levels of income and consumer spending by an expanding middle class.
- Complementing this ongoing secular theme is increased consumption in specific discretionary categories amid the COVID-19 pandemic.
- At Nuveen, greater discretion in stock selection has enabled our actively managed EM Equity strategy to consistently generate alpha.
- Our strategy emphasizes consumer-oriented sectors that we believe may benefit the most from long-term EM consumption trends.
EM: A growing share of global GDP and market opportunitiesEconomic growth in emerging markets (EM) continues to outpace that of developed markets (DM). Having eclipsed DM economies a decade ago with a larger and faster-growing share of world output, EM countries now account for roughly 60% of global GDP, according to International Monetary Fund (IMF) data, as shown in Figure 1.
This steady growth trajectory has provided an expansive backdrop for the development of EM equity investing. Since its inception as an investable asset class in 1987, the EM equity universe has grown at an exponential rate.
Today it represents $24.5 trillion in market capitalization — nearly a third of the world's total (Figure 2).1 Investors seeking alpha and well-diversified global equity exposure in their portfolios can ill afford to ignore the opportunities that EM equities offer.
A rising middle class drives emerging markets growthCritical to the growth trends in EM economies and equity markets is rising consumption by middle-class EM consumers. In larger EM countries, the middle class is typically a family earning $3,000 to $10,000 per year when measured in equivalent purchasing power.2 The consumer base in these EM economies is young, made up of hundreds of millions of people and growing three times more rapidly than in the developed world.3
Across the broad EM universe, consumption trends may vary widely depending on a country's stage of economic development. When gross national income (GNI) rises and countries begin to develop a middle class, discretionary spending typically accelerates. Plotting GNI per capita against household consumption per capita for multiple EM countries results in what we call a consumption "S-curve," shown in Figure 3. The farther a country's position a long the curve, the higher its income level and the more established its middle class. The majority of EM countries, however, are closer to the front end of the curve — meaning they are still in the earlier stages of income and consumption growth, and therefore may offer extremely attractive long-term investment potential.
2Boston Consulting Group
3 Boston Consulting Group
4strategy+business.com, "6 Truths About Emerging-Market Consumers."
5BCG Edition 1: "COVID-19 and the Emerging-Market Consumer—Five Trends to Watch," April 2020
6BCG Edition 1: "COVID-19 and the Emerging-Market Consumer—Five Trends to Watch," April 2020
7 Forrester Research Group; Boston Consulting Group
8Boston Consulting Group, COVID-19 Consumer Sentiment Snapshot #2: Racing the Clock, March 2020; Alibaba news release; WeChat data; Tmall International data; Taobao online shopping data
9BCG Center for Customer Insight
10Forrester Research Group; Boston Consulting Group
An exchange-traded fund (ETF) is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. An ETF trades like a common stock on a stock exchange. The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The MSCI EAFE Index consists of the following 21 developed market country indexes: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The MSCI Emerging Markets Index consists of the following 23 emerging market country indexes: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates.
A word on risk
This material may contain "forward-looking" information that is not purely historical in nature. Such information may include projections, forecasts, estimates of yields or returns, and proposed or expected portfolio composition. Moreover, certain historical performance information of other investment vehicles or composite accounts managed by Nuveen may be included in this material and such performance information is presented by way of example only. No representation is made that the performance presented will be achieved, or that every assumption made in achieving, calculating or presenting either the forward-looking information or the historical performance information herein has been considered or stated in preparing this material. Any changes to assumptions that may have been made in preparing this material could have a material impact on the investment returns that are presented herein by way of example. The views and opinions expressed are for informational and educational purposes only as of the date of writing and may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The information provided does not take into account the specific objectives, financial situation, or particular needs of any specific person. All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. Equity investments are subject to market risk or the risk that stocks will decline in response to such factors as adverse company news or industry developments or a general economic decline. Past performance is no guarantee of future results.
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