For decades, Canadians have looked to emerging market funds for diversification and growth potential in their retirement portfolios. These funds invest in countries and regions whose markets are young and vibrant. Home to 85% of the world’s population under the age of 30, these economies are still in an emerging growth phase that generally offers investors greater long-term growth potential but with higher risk than developed countries.
Emerging markets have, on average, grown two to three times faster than developed markets. In 2019, emerging-market countries accounted for 59% of the world’s GDP growth. (based on PPP-adjusted USD)1
Looking forward, challenges still lie ahead for emerging markets as they grapple with the economic fallout of the coronavirus. Nonetheless, we are optimistic that many emerging-market countries will eventually resume their growth trajectory. Their recovery should be aided by continuing monetary and fiscal stimulus in the near term. Their longer-term growth should be driven by favorable demographics, growing domestic consumption, infrastructure investment, and the gradual revival of global supply chains. Over the long term, we believe that emerging markets could once again be capable of delivering rates of growth hard to find in developed economies. Today, after sharp declines in global financial markets induced by the COVID-19 crisis, emerging-market equity prices have corrected to the lower end of historical ranges. In addition to attractive valuations, emerging-market equities provide valuable diversification potential for Canadian investors. In part, this is because emerging markets include two dozen countries with different economic drivers and divergent economic cycles. It is also because they contain industry sectors that are not only under-represented in Canada, such as consumer discretionary and technology, but also sectors that provide direct exposure to the strong secular themes of growing domestic consumption and can also benefit from the increasing role of technology in economic development. Canadian equity markets, in contrast, are dominated by just three large industry sectors: Energy (14%), Financials (28%) and Materials (15%).Together, these sectors make up 57% of the total market.2
Like their developed-market counterparts, emerging markets will no doubt face risks after the pandemic, and government policies might have to shift to address a different post-pandemic world. The post-pandemic reality could include uneven economic growth, continuing global trade frictions, an increasing corporate preference for more localized supply chains, and increased debt levels.
Actively managed Investment funds that rely on deep, rigorous, on-the-ground fundamental research and analysis of companies by well-trained and experienced investment professionals may better serve investors in a post-pandemic world. These professionals can uncover both opportunities and hidden risks. Active investment managers can also identify, monitor and adapt to the broader forces of change shaping financial markets, thereby avoiding major pitfalls and benefiting from emerging trends.
Sun Life Global Investments continuously examines emerging markets to assess opportunities and risks. In the coming months, we will be publishing a new whitepaper outlining some of our findings.
1 IMF World Economic Outlook 2018.
2 IMF World Economic Outlook, 2019.
3 Source: TMX, as of May 25, 2020.
This commentary contains information in summary form for your convenience, published by Sun Life Global Investments (Canada) Inc. Although this commentary has been prepared from sources believed to be reliable, Sun Life Global Investments (Canada) Inc. cannot guarantee its accuracy or completeness and is intended to provide you with general information and should not be construed as providing specific individual financial, investment, tax, or legal advice. The views expressed are those of the author and not necessarily the opinions of Sun Life Global Investments (Canada) Inc. Please note, any future or forward looking statements contained in this commentary are speculative in nature and cannot be relied upon. There is no guarantee that these events will occur or in the manner speculated. Please speak with your professional advisors before acting on any information contained in this commentary.
© Sun Life Global Investments (Canada) Inc., 2020. Sun Life Global Investments (Canada) Inc. is a member of the Sun Life Financial group of companies.