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Lightweights: Popular Benchmarks Low on Growth Potential
Aug 3, 2021
Jennison Associates explains how passive emerging markets equity exposure leads to missing out on the most dynamic, fastest-growing companies in the region.
The most attractive emerging markets growth opportunities we see today are in companies that benefit from long-duration, secular growth trends. Establishing exposure to these companies through index-like allocations can be futile, however, as many mainstream emerging markets benchmarks tend to hold old-economy companies.
The highest-growth emerging markets companies historically have been innovators and disruptors that re-imagined the way people communicate, work, shop, and play. They have also profited from long-term growth catalysts, such as the growing middle class. However, many of these companies are underrepresented in popular emerging markets benchmarks. In fact, many emerging markets companies are the growth leaders of yesteryear—from financials, energy, materials, industrials, telecom, and consumer cyclicals.
Even growth sectors traditionally considered innovative and cutting-edge, such as technology, do not guarantee exposure to high-growth opportunities. The MSCI EM Index has a significant weight in technology, and its top four holdings (Taiwan Semiconductor, Tencent, Alibaba, and Samsung) account for about 20% of the index’s market capitalization.1 These companies, however, have established businesses and are mostly incumbent technology leaders in Asia. They do not offer the long-duration, accelerating growth potential we see in other up-and-coming investment opportunities. About 6% of the index’s weight in technology is in hardware, where we see very little prospect for growth.1
EM Index Offers Growth, But What Kind?
To seek passive or even broad-based exposure to emerging markets equities is to actively underweight some of the most dynamic and fastest-growing companies in the region.
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1 Source: Source: FactSet, MSCI, Jennison as of June 2021.
MSCI Emerging Markets Index is an equity index covering 23 countries representing 10% of world market capitalization. The Index is available for a number of regions, market segments/sizes and covers approximately 85% of the free float-adjusted market capitalization in each of the 23 countries. Indices are unmanaged and are provided for informational purposes only. Investors cannot directly invest in an index.
Index sectors were grouped by Cyclical/Rate Sensitive, Defensive, and Secular Growth. Sectors with diverse holdings (consumer discretionary, communication services, and healthcare) were analyzed at the industry level, with each industry assigned to one of the three groups. Cyclical/Rate Sensitive includes financials, materials, communication services/diversified telecom services and wireless telecom services, energy, industrials, consumer discretionary (except internet and direct marketing), and textiles, apparel & luxury goods. Defensive includes real estate, consumer staples, health care/pharmaceuticals, and utilities. Secular Growth includes information technology, health care (except pharmaceuticals), communication services/entertainment, interactive media and services, media, consumer discretionary/internet, and direct marketing.
Information contained in this product or report is derived by Jennison in part from MSCI’s Index (the “Index Data”). However, MSCI has not reviewed this product or report, and MSCI does not endorse or express any opinion regarding this product or report or any analysis or other information contained herein or the author or source of any such information or analysis. Neither MSCI nor any third party involved in or related to the computing or compiling of the Index Data makes any express or implied warranties, representations or guarantees concerning the Index Data or any information or data derived therefrom, and in no event shall MSCI or any third party have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) relating to any use of this information. Any use of the Index Data requires a direct license from MSCI. None of the Index Data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.
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1050703-00001-00 Ed: 08/2021