Emerging markets have undergone significant transformation over the past decade and a half. Chris Eddy, Head of Multi-Asset Funds at 10X, recently discussed these changes, their impact on investment opportunities, and South Africa’s positioning within this dynamic environment in a podcast with Michael Avery, Classic Business.
Press play below for the full episode:
Key themes:
A shift from commodities to technology
Traditionally, emerging markets were closely tied to commodities and Chinese growth. However, post the 2008 financial crisis, the narrative has shifted. The weight of materials and energy in the emerging market index has significantly dropped from 30% in 2008 to 14% today, while technology, communications, and consumer discretionary sectors have risen from 28% to 44%. This shift underscores the growing importance of technological adoption and innovation, particularly in Asia.
China’s waning dominance and the rise of India and Taiwan
China, once a dominant force in emerging markets, has seen its weight in the emerging market index fall from 42-43% in 2020 to 25% today. This reduction is due to various policies aimed at shifting growth from investment to consumption and regulatory crackdowns in the tech sector. Meanwhile, India and Taiwan have gained prominence, with India emerging as a significant commodity consumer and Taiwan becoming a tech hub, largely due to companies like TSMC.
Increased diversification in emerging markets
The diversification within emerging markets contrasts with the concentration seen in developed markets, particularly the U.S., where the “Magnificent Seven” tech giants dominate. Emerging markets now offer better risk diversification, with varied economic drivers and sectors. For instance, the valuation landscape within emerging markets is highly bifurcated. China’s market, currently at a 34% discount to its long-term valuations, presents different risks and opportunities compared to the high-growth Asia Pacific region, which sits at a 33% premium.
The potential and risks for South Africa
South Africa, often overlooked in the emerging market space, is gaining attention for its potential. Despite its challenges, such as consistent economic decline since 2010 and structural reform issues, there are signs of positive momentum. The country has seen over 100 days without load shedding, a significant improvement considering the impact of energy crises on GDP. South African assets, having been heavily sold off over the past eight years, now present a unique investment opportunity due to their undervaluation.