The changing face of emerging markets

It was generally agreed that the World Cup in Russia was run very efficiently, yet you may recall that the 2010 World Cup in South Africa was comparatively shambolic. This topical example demonstrates the changing face of emerging markets as an investment theme.   The image of emerging markets as energy and commodity producers is out of date.  The main drivers of economic activity now are the spending habits of the rapidly growing middle classes in developing countries.  This has caused a rapid growth in activity in the information technology, financials and healthcare sectors.  Ten years ago information technology stocks took up just 10% of the most widely used emerging markets index, the MSCI. Now companies in the IT sector comprise a massive 28% of this index.

The other side of the coin has been the relative decline in energy and materials producers whose fortunes were linked to the gyrations in commodity prices.  In 2008 when oil prices were touching an all-time high energy and material producers made up 37% of the MSCI emerging markets index; now that proportion is down to 14%.

The contrast in organisation of the World cups in South Africa and Russia illustrates the growing sophistication of emerging markets.  Around four years ago the close correlation between energy prices and emerging markets broke down. Emerging markets should no longer be viewed as a commodity market play, but instead have become a strong technology play.  Indeed the weighting of information technology stocks at 28% in emerging markets is higher than in the US stock market at 24%. You could say that emerging markets have moved on from BRICS to clicks.

Brian Durrant