Emerging Markets continue to be places of transformation and excitement. Here are five things to watch out for in 2020.
1. Rising Environmental Consciousness in EMs
Environmental commentary in the West tends to dismiss attitudes in emerging markets as lagging, given that their focus seems to be on economic growth at almost any cost, and not on environmental protection. The use of coal in power stations, especially in China and India, has barely dropped, while in Europe and the US it has plummeted. But EM governments are increasingly seeing the need to act more responsibly towards the planet, driven in many cases by shifting popular opinion. Over the past few years, we have increasingly heard environmental concerns from the consumers we meet. They tell us that they are concerned about pollution, the impact of climate change, or the amount of packaging on the products they buy. The voices of large and growing younger populations, which tend to have more environmental awareness, are also increasingly being listened to by emerging market policymakers.
2. A Further Squeeze of the Middle Classes
People in the middle classes in many EM societies have stagnated economically and are they are feeling squeezed. Cost of living increases have meant greater demands on limited incomes. At the same time, those incomes are under more and more pressure, with those from lower socio-economic groups increasingly accessing education, making themselves just as eligible, but arguably even more hungry, for employment. With competition for employment, the middle classes can no longer rely on a “job for life.” When India’s Prime Minister, the son of a street tea seller, so frequently reminds people of exactly that, the barriers to social mobility for people at the bottom of the pyramid have been decisively coming down. This trend is only really just starting off and we can also expect these squeeze middle classes to vent their frustration.
3. A Challenge to US Hegemony in Social Media: The Rise of TikTok
Social Media in most countries (notably not China) is dominated by US companies. We see their dominance being seriously threatened in the year ahead. Facebook, for instance, not only suffered an embarrassing setback with its Libra cryptocurrency project but is also being challenged by TikTok in its core markets). During our Immersions visits, people in both rural and urban areas tell us that they find TikTok to be accepting and inclusive as opposed to the culture of perfection on Facebook and Instagram, fed on a diet of staged content which they saw as judgemental. EMs are generally more inclusive collective societies, in contrast to competitive and individualistic cultures in Developed Markets, and TikTok reflects that. So we will be looking for more local brands to emerge that capture the mood and values of EMs, rather than following the ‘westernisation path’.
4. A Decoupling of Emerging Market Consumption-Driven Companies
Over the last couple of years, consumer-facing emerging market stocks have fallen and risen in sync with sentiment and news flow around the China-US trade clashes. While a broad global economic impact is probably inevitable, EM companies are increasingly looking to sell to domestic consumers, rather than focusing on exports to the US, and so those will likely suffer considerably less. There are various policy approaches such as those that directly boost domestic consumption in China, or pension, tax and labour reform in Brazil, which will drive private investment and will ultimately lead to a more rapid transition from infrastructure and export to domestic consumption. Not only will this put the changing tastes of EM consumers into greater focus, but it also, we think, should lead to a bifurcation of share price performance between companies with a domestic focus and those that export.
5. WILDCARD: Indian Street Sellers Going Cashless Before US Convenience Stores
Demonetization in India was a shock, but in conjunction with the national digital ID system and sweeping GST changes, we expect it to trigger to an incredibly rapid formalisation and digitisation of transactions in the country. In China, third-party mobile payments were estimated by iResearch to be RMB190.5tr (US$27.1tr) in 2018, and probably grew by more than a third in 2019. In conjunction with the government’s changes, we think that broad penetration of low-cost smartphones will facilitate the changes. In the West, relatively convenient card-based payment systems are expensive for merchants, but the entrenched interests of the traditional banks and payment system operators work to maintain the status quo, slowing down the shift to low-cost, modern payment systems.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of Trinetra Investment Management LLP and are subject to revision over time. Trinetra is authorised and regulated by the Financial Conduct Authority in the United Kingdom.