Emerging countries on the rise
After more than 10 years of poor market performance, the "de-dollarisation" sought by the BRICS countries could trigger renewed interest in this non-homogenous asset class.
The summer of emergence
The BRICS summit will be held in South Africa from 22 to 24 August. This eagerly awaited conference could result in the announcement of a new common currency for these countries, with the option of pegging it to gold or a basket of commodities.
Confirmation of this intention from Russia in July led to an initial downward movement in the US dollar. The US dollar could suffer as emerging countries seek to "de-dollarise" their currencies.
This conference will shed light on financial markets, particularly equities, which are often overlooked by investors.
There is no shortage of classifications and sub-classifications to represent so-called emerging markets and their stock market performance. To use only MSCI as a data provider: MSCI Emerging Markets, Frontier Markets, regional classification, national classification, etc.
The MSCI Emerging Markets is a relatively good representation of the main countries, including the BRICS. This index covers 26 countries and 1,390 companies, as opposed to the MSCI World, which represents 23 Western countries and 1,600 companies. It should be noted, however, that South Korea is one of the emerging markets, so caution is advised when making interpretations.
Classification of equity indices
In terms of stock market performance, there is a marked difference between emerging and developed markets, particularly over the last 10 years, with a widening gap to the disadvantage of markets in developing countries. Central bank support in Western countries probably accounts for a large part of this difference.
Equity market performance (in local currency)
If we take a closer look at the various national markets, there is no convergence of performance between the equity markets. The markets are disparate, their growth cycles unsynchronised and inconsistent.
As a sign of the growing importance of emerging markets, many companies in these countries are now world leaders. In terms of annual sales, 5 companies from emerging countries will be in the world's top 10 in 2022, compared with 4 in 2018. In 2018, 3 European companies were in the top 10, leaving just one in 2022.
TOP 10 companies (sales revenue, 2018-2022)
Under-representation of emerging markets
While Western countries have historically been able to boast much better inflation and unemployment figures, the current period of inflation is tending to limit this advantage. Only Brazil has higher levels of unemployment than Europe. Inflation is much higher in Europe and Australia than in Russia or Brazil. As for growth, it comes as no surprise that emerging countries are posting much higher levels.
Despite this, and as a result of the way the indices are constructed, emerging markets are vastly under-represented in the financial markets. The United States accounts for 25% of global GDP, yet 44% of global market capitalisation. Conversely, China accounts for 17% of global GDP but only 9% of global market capitalisation. Index providers are gradually increasing these values to make the weight of the Chinese giant more consistent.
It should be noted that Germany is under-represented by almost 3%. This economic incongruity stems from the country's structure, with its strong focus on SMEs, which by definition are not listed on the financial markets.
Over - or under - representation of markets
Financial markets, GDP and population
Finally, demographic weight is an essential consideration in these analyses. China, India and Africa are on the verge of becoming gigantic.
The summer of 2023 could well prove to be the year of the emergence of the emerging countries.