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Emerging countries’ companies: catalysts for  global economic growth
Emerging markets investment

Emerging countries’ companies: catalysts for  global economic growth

In this article, we will shed light on the place that these companies occupy in today’s globalised economy, as well as the development opportunities that they offer to companies from advanced countries. We will also explore the prospects for fixed income investment arising from this dynamic.

As highlighted in our previous article, “Are  emerging countries the new developed  markets?” emerging economies, once  seen as secondary players, are now at  the heart of global economic growth.  Against this backdrop, companies in  emerging countries are poised to assume  an increasingly prominent role in the  global economic landscape. Moreover,  emerging countries and their companies  are becoming essential players in a world  grappling with the challenges of climate  change and social inequality.

Position of emerging country companies in the world

The spectacular growth of the emerging countries’ companies over the last few decades can be explained by a combination of several favourable factors, the two main ones being: the access to highly demanded natural resources amid a major energy transition, and the emergence of the middle  class in these countries. 

Indeed, developing countries possess  resources that are essential to the functioning  and development of today’s world. The  distribution of these crucial resources  for applications linked to the energy  transition gives emerging countries and  their companies a central role in the journey  towards a more sustainable world. 

With European investments in mining and  energy projects slowing, China in particular  has invested massively, making itself a key  player. Rare earths, which are mainly present  in emerging countries, are an emblematic  example, with China holding the majority  of reserves at 44 million tonnes. By way of  illustration, the leading developed country in  this ranking, Australia, is only in 6th place with  4.2 million tonnes . 

Another instance involving China: in 2021, the  Middle Kingdom will account for nearly 80%  of the world’s production of photovoltaic  modules  and batteries for electric vehicles .  Nowadays, China is seen not just as “the  world’s factory”, but as a key player in the  end-customer value chain. 

It is not the only emerging country benefiting  from this trend. For example, lithium, an  essential material for batteries, has a strong  presence in Latin America.

Another region,  another advantage: Eastern Europe has the  industrial know-how to enable German car  brands to produce their components.

The second supporting factor is the  sociological evolution in emerging countries.  The strong economic development of  recent years has given rise to a middle class  whose purchasing power is stimulating the  local economy, encouraging the growth of  companies active in other sectors besides  raw materials. 

Sectors such as technology, communications,  financial services and manufacturing have  seen the emergence of national champions  that now compete with the giants of the  developed economies. Chinese companies  such as Huawei, Alibaba and Tencent, as  well as Indian firms such as Tata Consultancy  Services (TCS) and Infosys, have gained  global recognition.

Opportunities for developed countries’  companies

The development of emerging countries  is also having an impact on companies in  developed countries, which no longer see  them as mere suppliers of raw materials but  as attractive target markets. 

Companies such as LVMH and Volkswagen  have made them their flagship markets.  For many companies in the developed  world, extending their activities to emerging  countries is now their primary growth driver.  Unilever is a perfect example: over the last  20 years, the proportion of its operating  profit generated in emerging countries has  risen from 27% to over 50%. The situation is  similar for other major multinationals from the  developed world.

Furthermore, for companies from developed  countries, emerging nations offer a pool  of talented, young human capital that can  provide real added value in the search for  new solutions. Universities and centres  of expertise in emerging countries are  increasingly gaining international recognition,  attracting companies looking for young  talent. India is a perfect example, with cities  like Bangalore boasting a high concentration  of information-related professions.

Prospects for bond investors

As companies from emerging countries open  up to the world, their financing needs are  constantly increasing. Given the international  nature of this expansion, these companies  are increasingly relying on financing in hard  currencies such as the euro or the dollar. By  way of illustration, the dollar-denominated  corporate debt market in emerging countries  has grown from a nominal USD 280 billion at  the end of 2014 to more than USD 550 billion  today (November 2023) . This increase is  explained not only by a rise in corporate debt  issuance, but also by the broadening of the  market with more players within the economy.  

For developed countries’ investors, this  represents an opportunity to participate in  the development of these companies while  avoiding currency risk, which is sometimes  difficult to hedge.  In terms of yield offered, companies from  emerging countries often pay an additional  risk premium, which is more often linked to  country risk than to the company’s financial  risk. Over the long term, the extra yield on  corporate debt in emerging countries has  produced a superior performance (+0.77%  over 5 years  and 4.71% over 10 years )

It is therefore indisputable that emerging  markets are a vector for long-term growth,  and that the companies they harbour  and their development prospects enable  investors from developed countries to broaden the spectrum of their investments in  a diversified portfolio.

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