Investing in the Emerging Markets Evolution

Over the last decade, the dominant driver of EM growth has shifted from commodities to consumption and technology.

November 06, 2017

Emerging markets (EM) are expected to be the primary driver of global growth over the next decade (read 5 Drivers of Emerging Market Growth article for details), but a radical shift in the forces shaping emerging markets will require investors to think differently about their investment approach. As EMs continue to be buoyed by youthful populations and a rising middle class, consumption patterns will transition from being dominated by staples and essentials such as food, clothing, and shelter toward technology, consumer discretionary, financial services, healthcare, recreation, leisure, and personal care. As EMs gravitate from the “old economy” to the “new economy”—and as each EM embarks on its own unique journey—investors will need to focus on the cross-cutting themes, sectors, and companies that drive investment returns.

Percent change in sector weights in MSCI EM Index from December 2007 to September 2017

Technology and Consumer Discretionary allocations have more than doubled in the last 10 years.













% Change in weight from 2007 to 2017











Current weight











Source: MSCI


Leapfrogging into the digital era

Disruptive digital technologies and automation are eroding EMs’ comparative advantage in labor-intensive manufacturing. But for EMs able to adapt to disruptive innovations, the digital age may bring new opportunities. For example, companies in tech-savvy EMs such as Brazil, China, and India are able to leapfrog the construction of bricks-and-mortar institutions given the pervasiveness of their digital and mobile economies, which significantly exceed those of developed markets. India, for example, is now among the top three markets globally for app downloads from the Google Play store, while Chinese Internet companies such as Alibaba, Baidu, and Tencent are beginning to rival the more-established, developed-market Internet companies as measured by market capitalization.1 The investment opportunities unleashed by the rapid adoption of fintech and e-commerce alone are compelling investment themes for EM equities today.



Fintech companies require relatively low upfront capital costs to launch, meaning that they can thrive even in low-income economies. The rapid adoption of fintech in EMs allows consumers to gain access to modern payments and banking services while bypassing the inadequate bricks-and-mortar footprint of financial institutions. What is perhaps the most surprising feature of fintech and e-commerce investment opportunities in EMs relative to developed markets is the pervasiveness of Internet service providers and the rapid consumer adoption of their services. The multiple product lines of Tencent in China are a good example: WeChat offers instant multimedia messaging, Tenpay is the second-largest online payment system offering seamless connectivity to instant messaging services, Tencent Games is the largest online gaming community in China, and QQ provides an online news platform and browser. The success of EM fintech will be most evident in countries that enable innovation and foster entrepreneurship—especially through network connectivity, education, and regulations that foster digital innovation.



In countries with relatively underdeveloped bricks-and-mortar retail and young, digitally connected consumers, much of the growth will occur online in the form of e-commerce. In India alone, retail e-commerce sales are expected to grow from $16 billion in 2016 to more than $47 billion by 2020.2 Many large U.S. and EU e-commerce players have struggled in EMs for a variety of cultural, regulatory, and infrastructure-related reasons. Their slow progress has opened the door for local e-commerce platforms such as Argentina-based MercadoLibre and China’s Alibaba and to capture nascent high-growth markets. Investors looking to capitalize on the growing demand in EM e-commerce should focus on local or regional companies that have already developed their online and distribution infrastructure. Online marketplaces that provide consumer-to-consumer, business-to-consumer, and business-to-business platforms should all thrive, especially in countries such as Argentina, Brazil, China, and India, where most of these plays are public companies and can be accessed through public equity markets.

Investment opportunities in the digital economy

In low-income economies, only 1 out of 100 people 15 years or older has a credit card, yet 1 out of 10 has a mobile money account, highlighting strong demand for fintech.

By 2019, retail e-commerce sales in the BRICs are projected to be more than double total sales in North America and Western Europe combined.

Source: World Bank, eMarketer

The evolution of the new domestic consumer class in emerging markets will transition “needs-based” spending to more “wants-based” spending and favor technology, consumer, and healthcare sectors, which offer distinctly attractive long-term investment opportunities. However, future investment success will likely require a focus on investment themes and individual company fundamentals. Seasoned growth managers with the insights necessary to anticipate emerging markets trends and accurately assess individual company fundamentals will likely be the best positioned to generate strong returns over the long term.

Read PGIM’s whitepaper, Emerging Markets at the Crossroads   for a detailed look at the EM evolution and resulting investment implications.

Read Jennison Associates’ whitepaper, Investing in Emerging Markets Growth to learn more about shifting consumption patterns and the benefits of using an active management approach in emerging markets.

1 The Mobile Economy 2016, GSMA, 2016,
2 “e-Marketer Cuts Estimates for Ecommerce in India: New Currency Rules Limit Online Buying Options,” eMarketer, December 6, 2016, eMarketer-Cuts-Estimates-Ecommerce-India/1014800

BRICs is an acronym for the combined economies of Brazil, Russia, India and China. The MSCI Emerging Markets Index is a float-adjusted market capitalization index that consists of indices in 23 emerging economies and is designed to measure equity market performance in global emerging markets.

0311573-00001-00 Ed. 11/2017

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