Emerging-market winners in an age of disruption—companies, not countries

Since the turn of the year, emerging markets (EM) have been beset by growing concern as to the impact of the developing trade war and the prospect of further rises in U.S. interest rates.  As a result, performance has been volatile, with the MSCI Emerging Markets Index down nearly 18% as of September 30 from its year-to-date peak in late January. 


Key takeaways

  • While emerging-market stock performance has been volatile in 2018, long-term demographic and economic changes across the emerging markets continue to create fertile opportunities for well-managed businesses capable of sustained growth.
  • Selected emerging-market companies have learned how to compete with their developed-market peers, in many cases adopting new technologies and processes at lower cost than more established rivals.
  • Some of the companies that we target as bottom-up emerging-market equity investors have already achieved global capability, with many others positioned to become national champions.
  • We take a close look at three such companies and at disruptive changes in industries such as technology, e-commerce, and tourism.
It's been a rough year for emerging-market equities relative to global stocks

While it’s all too easy to become absorbed by the shorter-term macroeconomic and geopolitical influences that punctuate the day-to-day marketplace, the more profound and longer-term structural changes continue to create fertile opportunities for well-managed businesses operating across the EM. In seeking well-run businesses capable of sustainable growth, it’s important to retain focus on the dramatic changes in market structures and demographics that are likely to see many of the countries that make up the EM universe continue their path of rapid development.

The economic ascendancy of emerging markets is expected to continue

Change in the emerging markets

For much of the last 25 years, the traditional image of EM has been one of low-income countries operating in high-growth geographies. While they’ve generally been recognized as having the potential for significant domestic consumption, their growth has been driven primarily by debt-funded infrastructure spending and export-led demand from developed markets seeking low-cost goods. 

This picture, however, has changed considerably in recent years, as long-expected domestic demand has begun to take off across some of the more populous EM countries.  The trigger has been rising GDP per capita, which has pushed millions of people from largely subsistence existences into having rising amounts of discretionary income with which to make lifestyle choices.

While many of the 4.5 billion people in the low-to-middle income bracket in the EM economies—the bottom billions—live on less than US$10 per day, a growing proportion are economically active and increasingly adopting the attributes of middle-class consumers and households.Importantly, they’ve been growing in number—44% are under the age of 20 and 61% under 30—and are expected to continue to do so for the next 30 years. They’re predominantly urban dwellers seeking education and improved living conditions for themselves and their families.   

By 2030, the global middle class—households with a daily expenditure of US$10 to US$100 per capita, in purchasing-power parity terms—is expected to grow to 4.9 billion people (+3 billion people).2 Of these, 80% will be living in EM countries, including 3.2 billion in the Asia-Pacific region (mostly in China and India). The largest 12 EM alone are expected to account for 33% of global consumer spending.  As EM consumers benefit from increasing purchasing power, consumption patterns are expected to continue to move away from basic products and services. This will further drive growth in discretionary industries such as branded products, recreation, travel, education, healthcare, technology, and financial services.

Emerging markets are the engine for global middle-class growth

The next Industrial Revolution

Battle-hardened multinational corporations are active in many of these areas, and have in the past been viewed as an easy way to play EM. They’re now finding life to be increasingly difficult as local EM competitors have begun to appear, keen to capture the high growth and profits to be found in these rapidly changing areas of their economies. Significantly, we’re now beginning to see EM companies, having learned how to compete and succeed at home, applying their knowledge and skills to take the fight further, into developed markets themselves. 

It should be stressed that this process remains in its infancy. Indeed, to be successful, EM companies require a similar combination of factors relating to resources—financial, physical, and managerial—to those found in established developed-market players. However, they have the added advantages of learning from what has played out in the past—known as the second mover advantage—operational leverage with respect to the significant scale and growing marketplaces available to them, and fewer legacy issues relating to past capital investment and planning constraints.  As a result, many have taken the opportunity to adopt new technologies and processes more rapidly and at lower cost than their established peers in the developed world.  Significantly, the best companies we’re meeting with now spend as much on research and development as their first world counterparts.

From our perspective, as investors seeking EM companies demonstrating sustainable, quality growth—in financial terms and in regard to environmental, social, and governance practices—several industries have proved to be particularly fertile.  Some of our target companies have already achieved global capability, with many others positioned to become national champions.  These industries include:

  • Technology
  • Healthcare
  • Leisure
  • E-commerce
  • Industrial automation
  • Education


Driven by global demand for components and low-cost assembly, EM technology companies could historically be described as lagging-edge manufacturers.  They were often spawned by spin-offs from international firms that were lured by the prospects of lower costs and government subsidies. However, cost leaders are now beginning to give way to technology leaders as 15 years of information and communication innovation have seen the advent of more than 4 billion mobile phone subscribers.In addition, the development of related software services is revolutionizing the way households interact with retailers and other service providers.  Nowhere has this development been more dramatic than in EM, where poor logistics and little choice have traditionally meant high cost and substandard quality.     

Reflecting the dramatic incremental demand from its own large and growing consumer base, Asia has become the global center of smartphone production and innovation.  Significantly, this has not only spawned innovative manufacturers finding solutions for the new bells and whistles for the latest iPhone, but also domestic competitors such as Xiaomi, a company that’s quickly become China’s largest producer of smartphones and is rated #4 in the world.4
Notably, as hiring costs in the region rose, reflecting near full employment in China and South Korea, the adoption of industrial robots has accelerated. Having become the largest customer for the world’s leading producers of robotics—Fanuc (Japan), Yaskawa (Japan), ABB (Switzerland), and Kuka (Germany)—China is now seeking to rival them, as it not only acquires technology as reflected by Midea’s €4.6 billion takeover of Kuka, but oversees the rapid development of its own innovators in the field.     

Shipments of industrial robots to China have surged over the last 10 years

Importantly, we would observe that the importance of the capital investment being made by Chinese companies in replacing less low-cost labor by robots isn’t just the quantum, but in the applications.  Having first appeared in the automotive area, they can now be found across electronics and specialist manufacturing, with an increasing focus on collaborative operation.

Case study | Taiwan Semiconductor Manufacturing—global champion

Founded in 1987 by recently retired Morris Chang, Taiwan Semiconductor Manufacturing Company (TSMC), with a market capitalization of $228 billion, has grown to become the world’s largest dedicated independent semiconductor foundry.Since the 1980s, it’s been a trend for semiconductor companies to keep chip design in house while outsourcing the manufacturing process to specialist companies.  TSMC has established itself as the preeminent manufacturer, as evidenced by Apple choosing it to make the core processor chip for its iPhones.   The company has consistently invested in leading edge manufacturing capacity, often when competitors have reined in spending due to the cyclicality of semiconductor demand. Management has viewed this as a critical competitive advantage in the race to put more and faster processing power on ever-smaller chips.  The company’s strong focus on capital allocation has yielded envious results, as it has consistently achieved superior margins relative to those of its peers.  This has translated into not only the high growth rates that TSMC has achieved in sales and earnings over the last 30 years, but a rising share price and higher dividends as the company has raised its payout ratio.  We view TSMC as well positioned to become an even more important player in the expanding adoption of smartphones, the emerging demand arising from the Internet of Things, and the growing wave of industrial automation and machine learning.

E-commerce and logistics 

At a time when so much energy is being consumed trying to estimate the impact of a developing trade war, it’s worth focusing on the long-term benefits of the profound changes that have been taking place in logistics management.  This is particularly dramatic across the many EM countries that have been mired in red tape and poor supply chains for basic goods.  In a study undertaken in 2013, the World Economic Forum estimated that improvement in two key supply chain areas—border administration and transport infrastructure—could add US$2.6 trillion to global GDP and US$1.6 trillion in global exports.6 Clearly, reductions in supply chain barriers, as embodied by e-commerce and logistics initiatives, are more powerful than tariff reduction, as they improve efficiency in the movement of goods and recover resources that would otherwise be wasted. In addition, removing supply chain barriers opens new markets to potential consumers.  Tariffs, in contrast, are effectively a reallocation of resources within an economy, only capturing a modest inefficiency created by the tax.

Even a modest improvement in trade facilitation can have a big impact. The United Nations has estimated that putting all the Asia-Pacific region’s trade-related paperwork online could cut the time it takes to export goods by up to 44%, reduce costs up to 31%, and boost exports by US$257 billion annually.Alibaba, the Chinese e-commerce giant and one of the investments in the portfolio, is currently in the process of investing over US$15 billion to deploy smart logistics networks with the aim of achieving 24-hour product delivery across China and 72-hour delivery worldwide.  More important, the implementation of this initiative and others is expected to drive China’s proportion of logistics costs to GDP toward the 8% to 9% prevailing figure in developed markets from approximately 14% currently.  Over time, we would expect to see similar progress made in India, which remains challenged by its lack of transportation infrastructure.

Case study | Naspers—internet, e-commerce—aspiring champion

Despite its roots as a leading publisher of Afrikaans periodicals and books early in the 20th century, this South African company has become a broad-based multinational group focusing on communication, entertainment, gaming, and e-commerce across EM. Naspers has built out a portfolio of businesses with leadership positions in classified advertising, e-commerce, and gaming across Africa, India, Russia, China, and Brazil. For instance, it was an early investor—and remains a significant stakeholder—in Tencent, China’s leading gaming and social media company. Having gone through a period of extensive investment, management is now focusing on achieving scale across its e-commerce businesses. As a result, we expect the company to improve profitability across its main operating units over the coming years.  Naspers has proved to be very adroit in identifying opportunities and working with local partners to achieve leadership in new marketplaces and geographies, in our view. Following the sale of noncore assets and recent capital raising, we believe the company has the capital needed to successfully extend its growing international footprint.  

Leisure and tourism

One doesn’t have to look too far to see how the rising tide of consumer income in EM is being deployed with respect to both domestic and overseas travel.  As domestic economic activity has flourished, economy hotel chains offering a consistent service level (which includes Wi-Fi!) have sprung up in countries as diverse as Mexico, India, and China. Ticketing for trains, planes, and buses has been transformed from a laborious process that required cash payment and collection into an online experience revolving around smartphones and cashless payment systems.  Further afield, China has become the largest source of outbound tourists in the world—a trend that’s likely to persist, given that less than 10% of the population possesses a passport.8
In a similar vein, India is only beginning to make the same journey.  Its Bureau of Immigration recorded around 22 million international departures in 2016—three times the number a decade before.Given that only 65 million Indians—less than 5% of the population—have passports, the parallels with China a decade ago are very apparent.    

China is the global leader in spending by outbound tourists

Case study | Ctrip—tourism—aspiring champion

Founded in 1999 and listed on NASDAQ in 2003, Ctrip is China’s leading internet-based reservation and ticketing agency. The company originally built its business domestically by catering to the growing numbers of Chinese business travelers seeking a consistent service when booking transportation and accommodation. Ctrip rapidly came to dominate the online travel agency market. In recent years, the company has sought to increase its reach into international markets as it’s followed the rapidly growing numbers of Chinese tourists traveling abroad.  To this end, it acquired U.S.-based Tours4fun in 2013 and U.K.-based Skyscanner in 2016.  Ctrip has a commercial partnership with Priceline, the largest U.S. online booking agency, and an investment in Makemytrip.com in India, which trails only China as the fastest-growing outbound market in the world.  The company’s business is structurally attractive with high barriers to entry and high returns.  The online travel agency business in China remains in its infancy—as reflected by recent moves by the Chinese government to regulate it—and the potential is large as profitability begins to approach that achieved by more mature Western peers such as Priceline. 

Finding champion EM companies driving disruptive change

Emerging markets continue to feel the impact of global trade tensions, a strengthening U.S. dollar, the prospect of higher U.S. interest rates, and overall market uncertainty. While we believe the fundamental basis for investing in EM is intact and stock selection at the company level remains key, market volatility is likely to persist until there’s more clarity around the risks. That said, the convergence of demographics, government reform, and innovative technology is leading to strong and more resilient domestic EM economies in which a dynamic private sector is playing an increasingly significant competitive role. As EM investors, we view these trends as sources of compelling investment opportunities, and a growing number of EM companies are demonstrating sustainable, quality growth.  



1 “The Unprecedented Expansion of The Global Middle Class: an update,” Kharas, Brookings Institution, 2017.

2 “The New Global Middle Class: A Cross-Over from West to East,” Kharas, Gertz, Brookings Institution, 2010.

3  statista.com/statistics/274774/forecast-of-mobile-phone-users-worldwide, 2018.

4 “Worldwide Quarterly Mobile Phone Tracker®,” International Data Corp. (IDC), August 2018.

5 http://www.tsmc.com/english/aboutTSMC/company_profile.htm, October 2018.

6 “Enabling Trade 2013,” World Economic Forum, 2013.

7 “Estimating the Benefits of Cross-Border Paperless Trade,” United Nations Economic and Social Commission for Asia and the Pacific, 2014.

8 “2017 Outbound Tourism Travel Report,” Ctrip, CTA, 2018.

9 “India Tourism Statistics, 2017” India Ministry of Tourism, August 2017.