EAE On Session: Investment strategies in emerging markets
02 de December de 2020
02 de December de 2020
What is the current situation in emerging markets? How has the pandemic affected them and which factors should we bear in mind when investing in them? Over the last few months, the economy worldwide has been hit by an unprecedented crisis, which has altered the macroeconomic landscape of all countries, especially in the case of emerging nations. We therefore have to ask ourselves how to interpret the new economic reality in these markets.
The lecturer at EAE Business School, Santiago Arrechea, discussed this issue in the latest edition of the EAE On Sessions, giving the audience an overview of a series of essential factors for understanding the behaviour of emerging markets.
Are you ready for some macroeconomic insight? Let’s find out more!
There are 6 factors that condition markets nowadays!
Falling interest rates
The first factor involves the drop in interest rates. “European interest rates have always been higher than in the USA, with the exception of Switzerland”, explained the lecturer. “Now, in Europe, we have negative interest, from rates of 15% or 18%”.
Governments are taking advantage of these lower interest rates to issue more debt to stimulate their economies, which has triggered the second factor.
It is not only governments that are getting into debt, but companies as well. As a result, in 2019, total debt reached 258 billion dollars. “Indebtedness just keeps on growing and has even become a trend”, emphasized the lecturer.
“As long as countries can meet their commitments, nothing bad will happen”, added Arrechea. The problem starts when countries cannot service their debts. As a result, many people are already starting to put pressure on certain countries to start paying.
To look at this factor in greater depth, the lecturer gave three examples. The USA increased its public debt by 233% in 13 years. Japan is the most indebted country in the world, with a level equivalent to 261% of its GDP. The Asian country’s economy has been stagnating for years. In Europe, the United Kingdom has debts equivalent to 104% of its GDP, compared to France, at 102%, and Spain at 91%. “A large part of the pandemic impact has still not been felt, so these debts must be even higher nowadays”, clarified Arrechea.
The average lifespan of companies is falling
Moreover, the average lifespan of companies is decreasing very significantly. “In 1965, the average lifespan of companies was 33 years. It rose slightly in the 1980s but, overall, there has always been a downward trend. Nowadays, the average lifespan is 22 years and all indicators seem to suggest that, within a few years, this figure will drop to 12 years”.
Investments in sustainability
Investments in sustainability are another factor shaping the behaviour of emerging markets. “In 2018, 33% of all assets were investments in sustainability”, explained Arrechea. “This has grown a great deal. In 2022, it will reach 50% and, by 2030, it is expected to reach 95%”.
At an international level, all agendas, such as the UN’s, are committed to investments in assets of this kind. Everything related to the environment, the social sphere and business governance is on the rise right now.
Concentration of securities on the Stock Market
Another key factor is the concentration of securities. The lecturer explained that “big companies, which are just getting bigger and bigger and have extremely strong capitalization, are concentrating a larger share of investments. We are primarily referring to US tech giants”.
In 2019, the 5 companies that accounted for most investments were Apple, Microsoft, Facebook, Google and Amazon. “The technological sphere is very important”, added Arrechea. “Moreover, the pandemic has intensified the digital sector. What used to be an unstoppable process is now accelerating faster than ever before”.
Central bank policies
Lastly, the lecturer focused on the policies of central banks as the sixth factor that shapes emerging markets. “Over the last few years, central banks have bought government or corporate securities in order to pump money supply into the market and foster dynamization, with the aim of promoting lending and investment”, he explained.
In Japan, for instance, they have been doing this for a long time, right back to the 1990s. As a result, the Japanese central bank owns 80% of listed securities. This trend is increasingly common nowadays.
Top emerging countries and coronavirus
According to the lecturer, the main emerging countries include Yemen (14.7% growth rate), Libya (10.8%), Dominica (9.4%) and Ethiopia (8.5%). Other countries making big progress include Rwanda, Ghana and India.
In terms of the impact of the pandemic, Arrechea explained that it has been an unprecedented crisis and the recovery will be tough. “Emerging countries will suffer and more than developed nations because they depend on investments in global supply chains and because they do not have the same economic fluidity and Western countries”.
Therefore, emerging markets cannot apply measures that help and accelerate recovery. As such, it is important to keep an eye on how the situation evolves over the next few months and not lose sight of the abovementioned 6 factors.